There is no doubt that the rapid spread of the COVID-19 virus around the world caught households, businesses and government leaders, as well as investors off guard.
These are unusual times so markets are reacting in an unusual way. By most measures, markets have now entered a bear phase. Corrections greater than 20% have historically been qualified as “bear markets”. Since World War II, we have had 12 occurrences of those. These 20%+ corrections tend to be associated with recessions which we believe is increasingly likely as a result of people’s swift and pronounced reaction to the virus so far. While always unpleasant, these corrections have been and will always be part of the investment journey.
As testing is ramping up in the U.S. and globally, the number of confirmed cases is increasing and the media has picked up on it. There is also no precedent for the first social media panic regarding the flu. People are scared. Since a vaccine for COVID-19 is unlikely to be a near-term proposition, people and businesses are taking measures to protect themselves. Economic growth and earnings will be impacted in the short-term.
Contrary to the general impression, we may already have a blue print of hope on the COVID-19.
Within China, the improvement has truly been amazing (see chart). The country has recorded just 8 new cases in the latest day – more than 400 times less than its peak infection rate in early February. China – responsible for just over 60% of the world’s cases – has managed to control the disease and is now in the process of restarting its economy. The hit to the economy was significant but short-lived.
Italy is the second country experimenting with aggressive quarantines. Italy is proof that a democracy with more substantial human rights than China can impose draconian measures as well. It worked well and quickly in China. We believe it will work in Italy as well.
South Korea’s approach to combating the spread has been different. Very few people have been quarantined but testing and tracking potential carriers have been widespread. Positive results are starting to show there as well with daily new cases on a steady decline since early March.
The point is that with aggressive and sustained measures, the virus can be beaten and quickly!
We ultimately believe this will be a significant buying opportunity for long-term investors. After entering February with an underweight position in equities relative to bonds, we are in a great position to take advantage of panicky investors. While everyone is selling, we are looking for opportunities to buy. We will be patient but attentive to catalysts indicating some visibility on the other side (the bright side). Potential catalysts could come from various sources. A peak in the number of new cases in the U.S. and globally, a vaccine or treatment to remedy the impact of contracting the virus, or a confirmation that simple preventive measures are rapidly slowing down the pace of contagion are signs we would be looking at. Alternatively, much more aggressive and coordinated monetary and fiscal policies or equity valuations that are irresistible would also compel us to become more aggressive.
History has proven, the equity markets will begin to rebound when the environment appears the worst. While we hear “it is different this time”, remember that the credit crisis of 2008-09 and the events of 9/11, etc also were. In a sense they all are, yet they all pass.
Thank you for your trust in us.