Morning Jog

Pause Button

It is a strange and perplexing period to be in, where minutes, hours and days seem to fly by at warp speed, but the calendar barely budges. Hard to believe that it was only three weeks ago that the NBA suspended the season – the demarcation line that brought the severity of the health crisis into the mainstream. Other leagues followed suit, Broadway went dark, and a cascade of stay-at-home orders followed.

We know that in the next few weeks, US case numbers will continue to climb. The lack of a unified national response (some state Governors just learning that asymptomatic people could transmit coronavirus!) may mean that they continue to climb for longer than we would’ve hoped for a few weeks ago. We also know that economic data will confirm the reality on the ground – everything is halted in order to buy us time for a medical solution.

As investors, case studies of previous bear markets should be labeled with a big asterisk, given the unprecedented nature of the current shock to the global economy. It is true that event-driven bear markets (those due to an oil price spike, an Emerging Markets crisis, war) are all shorter in duration than those due to structural (asset bubble) or cyclical (profit recession) reasons.


(Source: Statista)


Phil Libin, co-founder of Evernote, likened our current situation to intentionally pressing a big pause button on the economy. The question all investors are asking now, is what the music will sound like when we press play again.

Monetary and fiscal policy measures have been swift and unprecedented in scale to soften the impact to financial markets and the real economy. The Fed has cut rates, unleashed an alphabet soup of funding facilities honed during the 2008 financial crisis and is expanding its balance sheet to provide ample liquidity to the markets. The indiscriminate selling across all segments of the credit markets is over. The relief bill passed by Congress last week totals to 10% of our GDP. Yes, there will be delays and bureaucracy in getting SBA loans to businesses and direct deposits to tax-payers, but from a financial support standpoint, $2 trillion is a big number. And there is more to come.

Some parts of the markets may be beyond policy reach at this point. While the Fed is providing support to investment-grade corporate and municipal bonds, high yield (below investment-grade) markets are seeing stress.  Downgrades and defaults in smaller, overleveraged corporate borrowers are likely to escalate.


(Source: Financial Times)


Outside of this corner of the credit market, there is a bigger question about permanent changes to how we conduct business and socialize after we come through this crisis. What will sporting events look like? To what extent will tourism and business travel pick up? How will downtown commercial real estate fare as remote working expertise grows with each passing day. Economies will be restructured and supply chains brought onshore. The true magnitude of all these behavioral and economic changes will be a function of the duration of this crisis and the medical solution that we  ultimately arrive at.

While there is a lot we don’t yet know, one thing we can be certain of is that equity markets are forward looking. 2020 will be a washout for earnings and GDP, but there will come a time, before economic data starts to improve, when markets begin to discount what 2021 and future years look like. And while it may seem like an obvious statement, it is evidenced in real data — the best predictor of long-term performance in the equity market is the starting valuation.  Whether today, next week or next month is the bottom in the bear market is unknowable, but the as market reprices for a recession, it becomes a better opportunity for long term investors.


(Source: LPL Financial)


We will emerge from this crisis. Sure, with really awful haircuts. But made stronger as investors and with more resiliency in our healthcare system and the economy.

Be well,
Alex