Even though the Fed cut rates on Tuesday, does that help you understand the current situation? It’s easy to get swept up in the minute-by-minute news about Covid-19 and how bad things will be here in the U.S. Of course, we should be concerned. Everyone from teachers, scientists and investors are trying to predict the virus’ impact on society, its lethality and when the stock market will bottom. We have few hard facts to analyze at this point, which makes it even more scary.
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Investors are swamped with long emails from their money managers that are vapid in content—predictable phrases like “we are working on it” and “don’t worry.” But their attempts to soothe and educate miss the mark. The format of such letters are remarkably similar in structure: informing you that your managers are constantly surveying the landscape for any changes; referring to historical selloffs and their recovery time; and closing with “we don’t know anything yet but will keep you informed.” Masters of the obvious!
We are at a point of maximum uncertainty, with no compass to guide us. The facts on the ground are fluid, and I suspect these conditions will be with us for some time. Focusing on yield curves, bond spreads and other tangible measures may be self-soothing, but it doesn’t lead you forward. What to do?
Perhaps a better approach is to think about the American spirit and how we have prevailed over anything that has come our way. This may seem far from the topic at hand, but I find it more helpful than parroting past selloffs and how long it took to recover. It allows us to picture a way forward through the haze, but with an eventual positive outcome. This is very helpful for long-term investors.
The virus has given the U.S. the opportunity to showcase our superlative talent in medicine, pharma research, teamwork and overall tenacity. Putting politics aside, there is no doubt that America has the best and brightest working in concert to solve this challenge. That’s what we do. For example, during World War 2, America typically demonstrated remarkable tenacity and brilliance through the Manhattan Project as we raced to develop the atom bomb first. That template is a theme that has recurred throughout our history, and it is playing out presently. This time around we also see capitalism as a catalyst that provides even more momentum to solve the problem. When the president assembled some of the top pharma CEOs for a briefing recently, a CNBC reporter present at the briefing told me there was a healthy spirit of competition when discussing how soon their companies may succeed in solving the problem. That’s America at its finest.
Of course the stock market will continue to be more volatile than usual. Going back to the Manhattan Project, imagine if investors had been continually updated about that erratic path to success. There would be constant lurching between “we are winning” and “we are losing,” and markets would have been just as volatile as they have been these past weeks.
The U.S. will prevail against the virus, like it has done many times with other threats across a wide spectrum. GDP and other business measures will show the temporary effects, and could be followed [by] early signs of recovery. There is much research on this topic, including, for example, The Economics of Natural Disasters published by the Federal Reserve Bank of St Louis in 2018. An analysis of Hurricane Katrina showed that the GDP of Louisiana showed accelerated recovery within the same year as the disaster, suggesting such results can be scaled to other disaster recovery scenarios.
The U.S. will prevail against the virus, just like we have done many times with other threats across a wide spectrum. GDP and other business measures will show the temporary effects, but should be followed by a big comeback. I expect for American brilliance to prevail once again, and thus I remain fully invested, confident about the outcome.
Opinions expressed are subject to change.