As of Friday, the stock market had risen 28% from its March low. Indeed, the WSJ reports that the Dow enjoyed its best 15-day stretch in more than 80 years. Investors have been encouraged in recent days by signs that several states will move to reopen, along with hopes that a viable treatment for COVID-19 could be near. Researchers are on overdrive worldwide both for the development of a vaccine and treatment. The IHME (University of Washington) Model upon which Drs. Fauci, Birx, et. al. rely is considered dispositive. It currently shows the peak in deaths nationally was 6 days ago and the peak in hospital resource use was 7 days ago. It predicts fewer than 10 deaths per day nationally by the end of May.
But the economy is still struggling. How can we wipe out 10 years of job gains in four weeks? How can the $350 billion Paycheck Protection Program for small businesses run out of money in just 13 days? The International Monetary Fund (IMF) predicts the “Great Lockdown” recession will be the steepest in almost a century and warned the world economy’s contraction and recovery would be worse than anticipated if the coronavirus lingers or returns. The IMF estimated global GDP will fall 3 percent in 2020. That compares to a January projection of 3.3% expansion and would likely mark the deepest dive since the Great Depression. Federal Reserve Bank of New York President John Williams said even a swift resolution to the coronavirus pandemic is unlikely to bring a fast recovery to the U.S. economy.
Over the next two weeks, 739 companies in the S&P 1500 will report their first quarter results and give guidance for the year ahead. Many companies, however, are already pulling guidance for the year since they have no better crystal balls than anyone else on when the COVID virus will be under control and a sense of normalcy will return. How soon will the millions of unemployed return to work? How many small businesses will fail and produce a permanent loss of jobs? How soon will we feel comfortable going to a mall or a theater or a restaurant? What will the “new normal” look like?
The world watches as a number of economies begin, or plan, to lift certain lockdown measures that were earlier put in place to slow the spread of the coronavirus. China may have been the first to do so last week when it reopened Wuhan, the industrial city of 11 million that was ground zero for the novel virus, though life there is still far from normal. This week, Italy began allowing small shops such as clothes retailers to reopen, with strict distancing guidelines still in effect, while Spain has allowed manufacturing and construction to resume operations. Germany is set to start gradually reopening its economy next week. In the U.S., some governors have expressed interest in easing restrictions sooner rather than later while other governors and mayors, meanwhile, are tightening restrictions.
We expect market volatility (in both directions) to continue for quite some time. What is important for investors to remember is that while daily prices can change dramatically, the underlying value of operating companies rarely does so. The value of a company is the present value of its long-term future cash flows. When you own a stock, you own a part of that company and its revenue and earnings stream. Ideally, that company will reward you with an increasing stream of dividends if it is financially strong and has an excellent business model. Quality has never been more important than it is now.
We will be closely monitoring the earnings reports that ensue over the next several weeks and continue to look for high-quality companies that you will want to own for the long term. History is clear that, if you have a long-term investment horizon, being an equity investor provides the greatest opportunity for a real (after inflation), positive return.
The LVM Team