Today, I want to talk about the virus update, the economic stimulus package, how it’s affecting markets and what to expect next. Let’s talk about what we know first on the virus – you can all read, so I’ll be brief. So what do we know? The COVID-19 is apparently showing all signs of being seasonal as it warms up, transmission rates slow. It doesn’t mean it’s going to go away. Just means we’re going to hopefully get more time for the hospitals to build up their beds, their inventory of equipment, their respirators. New York City of course is getting hammered, and it’s right in that critical weather temperature band of locations that are most susceptible to this. We’re seeing that the fatality average rate is still less than 1% where there’s good health care, and it’s also age and health dependent.
For growth rate the United States is seeing a transmission rate of doubling every two days. The death rate doubling every three days. We expect that will start to taper a little bit once all of the different measures are in place. There has been a lot of talk about developing a herd immunity. And why not just go back to work and get through this? The issue isn’t that we’re not – most of us – going to get this, it’s how fast does it go through society? Because at the rate of transmission, the hospitals will be overloaded, and sadly if you can’t get into a hospital for those populations the death rate skyrockets from less than 1% to up to 5% or even greater. So it’s really important to flatten the curve. But yes, by the end of Summer people will be getting back to normal, somewhat, even though there may be subsequent waves in the future. We just need to get the facilities in place. So this is all about buying a little bit of time. We’re going to see it peak probably in May – late May at the latest – and then a drop off. Now, again with temperatures rising, that peak may be moved forward, but then expect another wave after the Summer’s over.
Long story short, by Summer people will increasingly be getting back to work. There will be a false sense of security and almost certainly guarantees, based on previous experience with pandemics, second and third waves in the Winter. And as long as we’re smart and keep spending money on medical facilities and equipment, we’ll be better able to manage those. There’s an economic package that’s being voted on as soon as possible. A $2 trillion package. And I think the most important thing is – in this world where we talk about people screaming at each other politically, everyone’s not coming together – this is a remarkably bipartisan bill. The Republicans were right to move on it fast. And frankly, I think the Democrats were right to add in a few checks and balances. It really looks like given the time commitments, the time pressures involved, that this is an extraordinary bill. Very well-timed, very comprehensive.
We’ve learned some lessons from 2008. One is move big, move fast. And the second thing we’ve learned is it’s important for the government to get equity for these loans. Just giving money out, just writing checks – yeah, it’s helpful, but get the equity because that’s how the Treasury is going to get its money back. We actually made money when all the dust was settled after 2008 despite massive infusions to businesses. The money they made on the equity offset the costs. There’s no reason this can’t happen again. So the objective for the government, for Treasury, the administration, is to bend, don’t break, the economy. And clearly everybody gets the risk of completely breaking the economy. But we do need additional relief from traditional bankruptcy. We need businesses to go back to, and clearly institutions are struggling with that. A lot of communities, a lot of municipalities have put foreclosures, bankruptcies and other things on ice. And that’s an appropriate move. We’re going to deal with the carnage later. We also need to help those most in need.
There’s a huge swath in our society in the bottom 20 to 30%. They’re losing their jobs and they don’t have health insurance in the short term. Taking care of their medical needs is important. But, for these people getting back to work is paramount. And it’s going to be quite a challenge to encourage them to stay home while they’re starving, short of not having a job to go back to. So those are challenges that are being addressed in the bill somewhat, by trying to extend unemployment and make direct payments to those most in need as soon as possible. All make good sense from an economic perspective.
So there is a certain amount of fear about the size of the package, the size of the bailout. And what I like to talk about briefly is the return on investment of doing this versus the opportunity costs. One of the problems we have when dealing with this type of event, is we don’t have a test case. As often as not we don’t see what happens if we don’t take action. Actually in 2008 we did see what happened if you didn’t take enough action. And some of the Mediterranean countries in Europe were starved of capital because of the nature of the European union and the risk-sharing they have. And it was devastating for them. So yes, there will be a return on investment for the Treasury – as much as this costs. The counterfactual, if we don’t do it, will cost more. Both in lost taxes and lost economic production. So there’s not a choice between spending and not spending. It’s a choice of spending or getting hurt even harder on the end. And exactly what those numbers are, we don’t know. But we do know from 2008 that it exists. It’s clear to me the both parties are acting as if they’re aware of that. So that’s a good thing.
There are other lessons to be learned: much more systemic about the health care system, about the ability to take paid sick leave. Other things that will be things to talk about at a later date and really aren’t relevant right now, and certainly shouldn’t be holding up any aid or assistance. So markets yesterday were up 11% for the Dow, 9% for the S&P. It’s easy with hindsight to think about what should have been done in the past, but if you keep a journal, you’ll find that your hindsight is very different from the information that you had at the time. Don’t beat yourself up. We just deal with the information we’ve got and we move forward. We have no idea how this is going to unfold. Well, we do know that the markets turn abruptly and we’re in a situation where we have a falling knife. There’s no question that the market has been falling very abruptly as it adjusts to the environment.
There’s nothing we can do that doesn’t run the risk of now missing out. Anyone who pulled out of the market towards the end of last week have missed out on the 11% and the 9% gain. That doesn’t mean that the market is not going to zag on down some more. We just don’t know. Markets predict and as soon as it’s clear as day that this is under control, the markets will start bottoming out and coming back. And frankly, nothing that I’ve given you is a secret. So I wouldn’t be surprised that that’s sooner rather than later. What can we do? We are de-risking fixed income. We de-risked a month ago. Thank goodness. A lot of the BBB credits are now junk. We’re de-risking again. We’re moving even further into some treasuries and further away from potential risks because the bonds are what you’re going to use to rebalance into equities once the dust is settled. And it is absolutely essential that the risk be in the equities. The good news with equities, is they always come back. The good news for investors in general – those who can get through this – is the repricing of assets will mean the environment for future investments will be better than it’s been in quite some time. So be primed to rebalance. Be ready to buy when this happens. In October 2008 those who bought recovered quickly. Those who didn’t took almost the whole decade, subsequently, to get back to zero. We wish you the best of investment success, and please be healthy, be safe. Thank you.
Reference:
https://www.ft.com/content/c8ed3692-6db3-11ea-9bca-bf503995cd6f
https://www.ft.com/coronavirus-latest
https://www.morningstar.com/articles/972122/the-importance-of-staying-invested-in-volatile-times
