The COVID-19 (coronavirus) crisis has expanded rapidly, taking on a more serious tone with each passing day. What was initially derided by skeptics as “just the flu” and a political hoax has now become an all-out declaration of war on an unseen invader. Countermeasures have escalated from hand washing and fist bumps to border closures, social distancing, lockdowns and mass business stoppages. Stock market investors hate uncertainty and the resulting market declines have been nothing short of breathtaking, bringing new meaning to the expression “March Madness.”
Like many companies, most Oxford associates are working from home as we attempt to do our part to keep our employees’ families safe and “flatten the curve.” But rest assured, we are fully functional and fully engaged – and laser focused on meeting the needs of our clients.
Importantly, we are also calm. This isn’t Oxford’s first bear market. We have successfully navigated tech bubbles, terrorist attacks and financial market meltdowns. We will get through this latest challenge as well.
Where Do We Go From Here?
The number of new infections will continue to increase rapidly for a period of time and the gloomy headlines will get even worse before they get better. Nobody knows how deep or lengthy the economic downturn will be, but it is clear second-quarter GDP growth will be ugly – perhaps the worst any of us have ever seen. A global recession, perhaps even a depression, appears inevitable.
Many market pundits believe this will be a painful but short-lived event, primarily isolated to the second quarter. They forecast a rapid decline in new COVID-19 infections once the more extreme countermeasures being adopted today are in place for 2-4 weeks. These actions, combined with warmer spring weather, will allow for the economy to start to reopen and normalize, possibly starting around May. Under this “V-shaped” scenario, many businesses would experience meaningful short-term stress but the vast majority would survive. Economic growth could potentially be quite solid – even strong – over the second half of 2020.
We hope these optimistic forecasts prove correct, but it is wise to also prepare for a more protracted period of economic decline and market disruption. Despite all the steps taken to date, the US has not fully adopted China’s effective but more draconian approach; nor has the US proven capable of the wide-spread testing successfully implemented by South Korea. Sad to say, slowness in recognizing the threat and a lack of resources may have put the US on a path similar to Italy, which has seen area hospitals overrun and has displaced China as the virus’ global epicenter. Under this scenario, recovery may look more like a “U” or a “Nike swoosh” than the aforementioned “V”.
At the risk of being cited for alphabet abuse, there is one other scenario that worries us. Trump will be under tremendous pressure during an election year to declare containment and reopen the US economy as soon as possible. When that occurs, undoubtedly new infection rates will have declined, but the disease will still not be fully eliminated. Actual containment could prove fleeting, especially when summer turns to fall and virus season re-flares. This double-dip scenario could take the form of a “W” and be especially treacherous for investors to navigate. Watching China and South Korea as they attempt to reopen their economies will be instructive.
As one of my colleagues recently noted, this is a medical crisis and we need a medical solution. Social distancing, zero-percent interest rates and trillion-dollar bailouts will soothe the wound but not heal it. Ultimately, we will be living with COVID-19 until a vaccine is widely available, which many experts say is at least 12 months away. Various promising therapeutics are also frantically undergoing testing and could provide nearer-term relief.
What Should Investors Do?
Oxford doesn’t know whether the recovery will ultimately look like a V, U, W or a swoosh (or maybe something else entirely); nobody does. One thing we are confident of, however, is that we WILL recover. And while it may take 12 months or more to develop a cure, we doubt it will take near that long for markets to find a bottom. Investors are forward looking. Signs of a slowing rate of infection or meaningful progress on a vaccine/therapeutic will be met with enthusiasm. Policy actions, such as a massive fiscal stimulus package, will also help prop up markets. The point is, market bottoms are impossible to time but this one is likely only weeks or months away, not years.
As you can imagine, the Oxford Investment Fellows are working tirelessly to assess the rapidly evolving investment landscape and monitor our clients’ portfolio positions. Some of the important issues we are watching include:
- The path of the virus
- Economic impact
- Global policy response
- Credit and liquidity conditions
- Long-term fundamentals
- Market valuations
As boring as it may sound, our advice is to stay disciplined and stay diversified. When we start getting the upper hand on this awful virus, a combination of investor optimism, pent up consumer demand and economic stimulus will likely result in a sharp bounce off the bottom. We don’t recommend trying to time the bounce but we do encourage leaning into it by thoughtfully rebalancing individual positions and asset classes. We are also on the hunt for new ideas, as we believe the broad indiscriminate selling of financial assets is creating opportunities not seen in years – in both public and private markets.
Most importantly however, our advice is to stay safe! At this historic period in time, all of us must keep an appropriate perspective and put our health – and the health of our loved ones – above all other considerations. This war will be won but the worst of the fighting still lies ahead.
The above commentary represents the opinions of the author as of 3.24.20 and are subject to change at any time due to market or economic conditions or other factors.The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.