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INVESTMENT STRATEGY

Investing in a Pandemic: Top 3 Things You Need to Know

The Pandemic Paradox

Our government, local leaders, businesses, and Americans across the country now face a very difficult pandemic paradox: the better we manage to contain the coronavirus pandemic, the greater the devastation to the economy.

To date, choosing to save lives has been a top priority for most governors. However, rising resistance to the shutdowns and mounting political pressure to reopen the economy threaten containment efforts. While social distancing protocols, shelter-in-place orders, and non-essential shutdowns are helping to flatten the curve, COVID-19 continues to spread (averaging around 30k new cases per day) and the number of cases is rising (now above 1 million in the US).

Although individual reasons may vary, the growing “Reopen America” movement centers on several viewpoints: 1) fixing the economic carnage and getting people back to work is a higher priority than the potential additional death toll from a second wave of infections, 2) as conditions in New York improve, the same can be said for the rest of the country, and 3) businesses can operate under strict social distancing protocols while the number of cases continues to plateau/decline (no second wave).

In contrast, the Director of the Center for Disease Control and Prevention warned Tuesday, April 21, that a second wave of the novel coronavirus will be far more dire and added, “There’s a possibility that the assault of the virus on our nation next winter will actually be even more difficult than the one we just went through.” The nation’s top infectious disease doctor, Dr. Anthony Fauci, recently stated that a second round of the coronavirus is “inevitable.” Further, the expert evidence we’ve reviewed suggests that if states start to reopen (without at least following the White House guidelines which include a steady decline in cases over a 14-day period), we will witness a second wave sooner than later.

On a more positive note, it is encouraging to see so many Americans coming together to solve this extraordinary crisis. We are all in this together and we are hopeful for a future when life can return to normal. The following thoughtful words about hope opened the virtual NFL draft 2020 on April 23rd:

pm-quote

How This Crisis Will Impact the Economy

While recent data on COVID-19 conveys we may be nearing peak of new daily infections, the hopes for a shallow economic “hole” and a quick “V-shaped” recovery may be a little too optimistic (especially if we face a second wave).

We have never seen a simultaneous health crisis and global economic shutdown (caused by a pandemic) of this magnitude before. In fact, we are experiencing the sharpest economic contraction since the Great Depression and what could be the most protracted unwinding of the labor and credit cycles we have seen since the financial crisis. JP Morgan’s CEO, Jamie Dimon, said he “expects an economic downturn similar to 2008” in his annual letter to shareholders.

Over the last five weeks, the U.S. has lost 26.5 million jobs as the unprecedented shutdown of the global economy takes its toll. This is a profoundly tragic total, that completely wipes out the employment gains since the financial crisis and effectively brings employment back to 1998 levels.

We anticipate bankruptcies, implosions (e.g. oil prices), and substantial deterioration of both the economic data and corporate earnings over the coming months/quarters. Although large integrated companies should be able to weather the storm, for some small businesses, it may be the end of the road unless there is more government intervention to save them.

Changes in consumer behavior and fears over future outbreaks will likely dampen the economic recovery. Bottom line, these shutdowns will have a permanent and lasting effect. 

Top Three Pandemic Investing Tips

We have come a long way from the stock market lows in March. Global economic stimulus has been historic and massive. Further, the narrative fueling this latest advance appears to focus on the best possible outcomes, including: 1) the virus is in decline and there will be no second wave, 2) a pharmaceutical solution will speed the return to an economic normal, 3) the economy/earnings will be 100% back to normal for 2021, and 4) both the monetary and fiscal stimulus from the government will be enough to bridge the gap. While we are hopeful for a quick return to normal, the current data readings are not good and caution is still warranted.

During this extraordinary and unprecedented crisis, maintaining an investment discipline and risk management process is important. Here are three investing tips to help you manage through this market volatility:

1. Stay Grounded, But Don’t “Do Nothing”

Understandably, on a long enough time horizon the markets should recover, but simply doing nothing could be detrimental to the health and/or long-term success of your investment portfolio. There may be times you should be taking profits off the table or looking to invest in new exciting opportunities. At the end of the day, optimal portfolio structures post-crisis may look a lot different and will most likely include higher levels of equity investments. Take advantage of market dislocations to realign your portfolio and set it up for future success.

Keep in mind this has never happened before. Risks are very high. Until we have a vaccine or successful therapeutic treatments, further economic damage from social distancing will hurt corporate earnings. Guggenheim’s CIO recently commented that “if earnings continue to fall as I expect them to, S&P earnings could get as low as $100 this year. Given the traditional market multiple of about 15 times earnings, that would put the S&P at about 1,500, still about a thousand points lower than we are today.”

2. Minimize Large Pitfalls

In times of extreme market volatility, economic recessions, and global pandemics, it is vital to place a high priority on protecting your principal. Remember, if a portfolio declines -34%, you need a +52% gain just to get back to break-even. By limiting the decline, it makes it much easier to recover. In other words, make sure your asset allocation matches your willingness to take risk and you have a risk management process to protect your capital.  Moreover, as risk managers, we believe there are several keys to effective, prudent, and successful investing, one of which is minimizing large pitfalls.

3. Invest Tactically 

There are profitable times to maintain a long-term, “buy & hold” view and there are times when it is more advantageous to employ a tactical style. Our research shows by aligning your investments to current macro-economic conditions, your portfolio will be better equipped to withstand the volatility and drive greater investment success. We call this approach “Investing for all Seasons.”

We Are Here to Help

While no one can be sure how long the current crisis will last, we continue to map and measure the data every day. Ultimately, this is a time to be prudent risk managers, but it is also a time to prepare for future investment opportunities.

With so much uncertainty facing both the markets and the economy, we are committed to helping our clients effectively navigate this challenging investment environment. If you believe your portfolio could benefit from our disciplined risk management, please don’t hesitate to contact us.

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