I wish it were that easy — accept that life is difficult and it no longer matters. Personally, I’m struggling to make sense of so many aspects of today’s extraordinary environment. I have used some shortened version of that opening quote with many folks over the years, including my wife and children. Shamefully, pretending to be some enlightened person, when the reality is that I’m endlessly conflicted. For me, the COVID-19 pandemic sharpens the intensity of my internal conflict. Perhaps there is some part of you that feels this way too.
Is successfully coping in the pandemic environment simply a function of whether you’re a glass half-full or half-empty personality type? That feels too clean. Aren't there many shades of gray? It has to be more complicated.
Of course, there is much to celebrate. The resilience of the human spirit. The courage and selflessness of frontline healthcare workers everywhere. The brilliance, ingenuity and focus that will likely aid in the discovery of a COVID-19 remedy soon. And, the bravery of so many workers that put their health and the health of their loved ones on the line daily so we can live, work and play. For all of this and so much more, our hearts are bursting with pride and full with gratitude.
However, there is also sadness. COVID-19 has infected some of our friends, families and neighbors. According to the Johns Hopkins Coronavirus Resource Center, there are 5.7 million confirmed cases globally, with 1.7 million in the US. Many have lost their lives to the virus. There have been 355,575 COVID-19 deaths globally, with more than 100,000 in the US. We still worry about our parents, grandparents and folks that are at high risk as a result of a pre-existing health condition. The human tragedy arising from the global pandemic is heartbreaking.
Change Means Movement. Movement Means Friction
I’m not a healthcare worker or a social scientist. The lens through which I examine the complex dynamics of the COVID-19 pandemic is my role as an investment strategist. I see three raging conflicts in the economy and capital markets as a result of COVID-19 as equally challenging. First, should the incredible and unexpected market rally from the lows on March 23 be celebrated? Or should the focus be on the terrible negative impacts from the economic recession and mounting job losses induced by the pandemic?
Next, all 50 states have begun to reopen in some way. Yet while there is considerable excitement about the reopening of the economy, there is understandable concern that as states reopen, infections, hospitalizations and fatalities will rise. In fact, The New York Times has reported that cases were rising in about a dozen states recently, including in several states that allowed early re-openings. And, a resurgence in COVID-19 cases may occur as early as this fall.
Finally, the bigger, badder and bolder than ever before fiscal and monetary policy responses to the pandemic were courageous. The fast reactions from the US government and the Federal Reserve (Fed) should be applauded. Yet, there are growing concerns that these aggressive policies have repeatedly robbed economic growth from future generations while sticking them with an insurmountable bill.
It’s not simply about being optimistic or pessimistic when it comes to assessing the difficult economic and market tradeoffs created by the COVID-19 pandemic. It’s about reconciling the short-term outcomes with the long-term implications of today’s unusual environment. So let’s delve a little deeper into the three troublesome scenarios outlined above.
The Market Is Not the Economy
The drastic difference in performance between the stock market and the economy since March 23 is remarkable. The S&P 500 Index has soared by nearly 40% since hitting its low in late March. Meanwhile, according to the Bureau of Economic Analysis (BEA), first quarter GDP decreased by 5%. Earnings-per-share (EPS) growth plummeted by more than 14% year over year for S&P 500 companies in the first quarter. The stock market rally has continued forcefully while the economic and earnings picture is only getting worse. As of May 28, the Atlanta Fed GDPNow forecast for the second quarter is a whopping -40.4%! Not surprisingly, Wall Street analysts predict that S&P 500 companies’ EPS growth will plunge nearly 43% year-over-year in the second quarter. Over the past 10 weeks, more than 40 million Americans have filed for unemployment benefits. The unemployment rate, which now stands at 14.7%, will easily surpass 20% soon.
Despite the economic pain, market participants believe that the negative impacts from the pandemic are only temporary and that a strong recovery is just around the corner. Investors are confident that massive fiscal and monetary policy support has bought enough time for COVID-19 to be defeated. And, finally, there is growing optimism that an effective health solution to the virus will be discovered shortly, clearing the path for a robust economic rebound.
When it comes to investing, things are never as good or as bad as they seem. Unfortunately, right now, stock prices reflect a near-perfect resolution to the pandemic. In short order, too. The risk is that some of the temporary impacts from the pandemic become more permanent, like the unemployment rate for instance. And if the economic and earnings numbers don’t start to improve in the third quarter, it might suggest that even more fiscal and monetary policy is required to bridge the gap until a health solution can be found. Progress on a potential health remedy for COVID-19 has been amazing so far but it’s still likely to take longer than markets are currently expecting. Enjoy the market’s unexpected rally — may it last forever — but keep a close eye on these potential pitfalls, too.