Over the past month, COVID-19 has created a massive paradigm shift that continues to impact our lives. You have no doubt heard a lot of speculation about the effectiveness of government programs in stabilizing the economy, massive unemployment not seen since the Great Depression, exploding levels of government debt, and life as we have known it BC (Before COVID-19).
We will not add our two cents to the cacophony of soothsayers attempting to predict what the future holds. No one knows with any degree of certainty what the future holds. We can be comfortable surmising that in times of uncertainty, people crave safety – for themselves and for their loved ones.
The markets have rallied about 25% off their March lows. While we are relieved by the speed of this partial recovery, it really has had nothing to do with the traditional metric markets are judged by; namely corporate earnings. The market’s move seems to be more of a reaction to the massive fiscal and monetary programs that government has enacted to support an economy voluntarily shut down to combat spread of the virus.
Government support for the economy, while welcome, is not a plan for future growth; nor will it sustain sectors of the economy that will experience permanent change to their business models. It is our opinion that the markets are not, as some commentators have opined, looking through the wreckage of the economy to a sunnier future. We believe that markets will have a more accurate picture of what company valuations should be once the economy begins to gradually reopen.
This is where the “hand off” from government to you becomes crucial. Seventy percent of U.S. economic activity is driven by your consumption habits. Nobody really knows how those will change once the economy begins to reopen. This uncertainty is the cause of much of today’s market’s volatility.
Your future spending decisions will be based in large part by how safe you feel. If you feel unsafe boarding an aircraft, visiting your favorite restaurant or booking a cruise, those company’s earnings will suffer. If you save more and spend less out of concern for you or your family’s safety, the markets will suffer.
At some point the government will tell you it is safe to come out of your bunker. Will you believe them? Will you trust the offers of companies who desperately want your business, governments that need more tax revenue, or the medical community whose opinions are based on science not hope? Whatever it takes for you to feel safe is when the economy will mend, markets will recover, and we will have a much clearer picture of what life AC (after COVID-19) will look like.