One of my all-time favorite music lyrics can be found in the 2001 release of the song ‘Fell in Love with a Girl’ by The White Stripes. In the song, Jack White sings about love-ridden angst while belting out one of my favorite lines – ‘these two sides of my brain need to have a meeting.’ It’s a simple line, but as I sit here working remotely and alone in my home office while being bombarded with COVID-19 information and market data from all sides, this lyric rings true. It’s during times like these when it’s imperative to find a balance between analytical thinking and emotion. We are all practicing social distancing at the moment, and this lack of social contact and normalcy can affect mindsets. Therefore, in an effort to remain grounded, I’ve been creating a simple daily habit of doing something that brings me joy. For me, that means cooking, reading, strumming my guitar, listening to music, and spending time with my wife and our young boy. In this spirit, I am organizing this communication around a lyric, song title, or album name of one of my favorite bands over the past 20 years – The White Stripes.
White Blood Cells – A COVID-19 Update As of this writing, there are nearly 230,000 cases of COVID-19 worldwide with 9,300 total deaths and roughly 85,000 recoveries. In the United States, there are currently 10,800 active cases, 154 deaths, and 106 recovered patients. Locally in Colorado, there are 221 confirmed cases, 2 fatalities, and zero recoveries (yet). These numbers are rapidly evolving, so I would like to share three resources that I’ve found instrumental in staying informed on the spread of COVID-19, and these are:
The Johns Hopkins Coronavirus Resource Center: Johns Hopkins has an excellent interactive map that compiles all of the COVID-19 data worldwide.
The World Health Organization: the WHO has a great deal of information online, including daily situation reports that summarize the global spread of this pandemic and important new developments.
The Colorado Department of Public Health and Environment: this is a local resource for Colorado residents, and provides updated data about COVID-19, testing, closures, and other resources and FAQs.
One thing is clear, nearly all experts expect confirmed cases to rise significantly in the coming days and weeks. This isn’t necessarily due to an increased spread of the virus, but due to the increased testing that has taken place across the United States. Ultimately, the COVID-19 pandemic is growing roughly 200% each week, which has caused an unprecedented societal response which we will detail below.
Girl, You Have No Faith In Medicine – The Pandemic Response In any typical year, I would begin practicing ‘social distancing’ today by quarantining myself in front of a television and watching roughly 96 consecutive hours of college basketball. However, this year, many of us are in self-imposed isolation in an effort to limit the immediate spread of the coronavirus. I am sure we’ve all heard ad nauseum about concepts like ‘flattening the curve’ and some of us may have even looked on YouTube for videos on how to build a homemade ventilator. Regardless, Americans (many of us, at least) are taking drastic action to limit the near-term spread of the virus in an effort to support both our families, our communities, and our healthcare systems.
I’ve heard some speak cavalierly about letting COVID-19 run its course. Why shut down the entire American economy for a few sick people? When thinking about this, I look at some of the data that’s coming out of the country that has done the most comprehensive testing and reporting on COVID-19 – South Korea. South Korea has tested over 307,000 people with 8,500 confirmed cases and 91 deaths. That roughly equates to a death rate of 1%, which we’ll use for this exercise. Let’s also assume that cases rise to the level that we saw in the H1N1 pandemic of 2009 where an estimated 60,000,000 Americans contracted the flu. If this is the case, we’d be looking at 600k deaths domestically – and please keep in mind that many experts believe that the fatality rate of COVID-19 is closer to the 2%-3%+ range, but we won’t know that until additional testing is done. Make no mistake – COVID-19 is serious, and effective social distancing will make a difference if implemented over a long enough period. The questions are – how long is long enough, and what will happen to the economy in the meantime?
Why Can’t You Be Nicer To Me – U.S. Economy & Financial Market Update I think it’s critical to stress that this is not the financial crisis of 2008. While issues like COVID-19 can add stress to the financial system, banks in 2020 are well equipped to navigate this environment. We are not seeing a systemic breakdown of the financial system like we experienced in the great recession.
Still, over the past several weeks, we’ve seen a massive flight to liquidity in financial markets, and this has resulted in a sell-off of both equities and fixed income as the baby gets thrown out with the bathwater. In the stock market, we’ve seen a significant selloff in equities as the economic realities of social distancing settle in. Prices have fallen at unprecedented speed and, based on information that’s been passed on to me, much of this activity in stocks is due to programmed/algorithmic trading strategies, and not necessarily institutional investors fleeing the markets. In normal circumstances, these programmed trade strategies are able to buy, sell and potentially profit as they navigate standard trading cycles. However, during times of significant volatility, these algorithms struggle to adapt, and this can cause some of the massive short term volatility that we’ve experienced in recent days and weeks. When it comes to fixed income (bond markets) it’s been reported that hedge funds managers, who typically use bonds as a ballast, are selling in large numbers in order to generate liquidity.
At Destiny Capital, we have always had a focus on high quality and low duration in our bond allocations. Higher quality bond issuers have better balance sheets, allowing them to effectively navigate difficult markets and this reduces default risk. Bonds with low durations have a lower sensitivity to interest rate movements, which can be key in times of interest rate fluctuations.
When it comes to the U.S. economy, the ultimate question is – will the United States enter a recession in 2020? At Destiny Capital, our belief is that – yes – the United States will enter a recession in 2020. Q1 GDP should be in normal ranges, while we expect to see a significant downturn in GDP in Q2. While there may be a slight rebound in Q3 2020, we still expect to see GDP in negative ranges, which would indicate that the United States has entered a recession.
Financial markets have been coming to terms with this reality, which is why we believe that some of this recession is ‘baked into the pie’ given current price levels. The question then becomes – how long will social distancing need to be maintained and, if it is an extended period, how will we get from here to there?
Expecting – Monetary Policy and Fiscal Response When assessing the depth and breadth of the economic impact of COVID-19, we need to have a sense of how long social distancing measures will need to be in effect domestically.
In the beginning phases of a crisis like this, I consider the Federal Reserve to be the ‘first responder’ whose job is to stop the bleeding, get some fluids running through the system and provide some near-term acute care on the way to the hospital. As you’ve likely seen in recent days and weeks, the Federal Reserve has acted swiftly and decisively by cutting the Fed Funds Target Rate to 0%-.25%. They have also pumped liquidity into markets through open market operations. However, while these acts are very important in providing a supportive backdrop to what’s going on the financial system, the stock market has largely shrugged-off these actions as prices have continued to fall. After all, a rate cut does not put a check in the hands of a restaurant worker who just lost his job.
To get us through the COVID-19 pandemic, fiscal policy will have to play a major role. Today, I was on a conference call with Larry Fink, the CEO of Blackrock – one of the largest financial institutions in the world. Larry is in ‘the room where it happens’, and is in ongoing meetings with the Treasury Secretary, lawmakers, and other CEOs in banking and financial services who are providing advice and counsel to decision-makers. The general consensus appears to be that it will take up to 10 to 12 weeks for the United States to get through the peak of the COVID-19 curve, which would indicate that social distancing will remain a part of the U.S. way of life for some time to come. If that is the case, then the U.S. Government will be looking at a stimulus package in the range of 1 to 4 Trillion dollars in order to support key industries and provide affected citizens with income to pay for housing and essentials. While this stimulus may come in phases, I would expect that the federal government will provide the support needed to get the U.S. economy through this crisis. In short, they will likely pull out all the stops.
“The problems at hand are lighter than at heart.” (Little Acorns) – We Will Get Through ThisAs a member of Destiny Capital’s leadership, I am required to take part in many keys – and often very challenging – decisions. As a team, whenever we struggle with a decision, we often stop and say “let’s take a moment and look at this situation in relation to our core values as a firm.” Our values are the northern star from which we navigate as a company, and this practice of reflection and consideration has provided tremendous value in guiding our decisions.
In times like this, I think it’s important to think about our core values as investors and two of the primary pillars of investing at Destiny Capital are:
1) We are long-term investors
2) We are disciplined investors
If 2020 is the ‘Year of the Virus’, then we would expect that 2021 to be ‘The Year of Recovery.’ There will be an end to this crisis, and we expect financial markets to recover as they have after all prior recessions. During the ‘Great Recession’, we had no sense that the end was in sight because a crisis in the financial system was so unprecedented. This pandemic is a little different because we know that, as my grandmother used to say, ‘this too shall pass.’ The biotech industry is in full-gear, the first rounds of vaccine trials have already begun, and medical experts are certain that there will eventually be a vaccine for COVID-19. Fiscal stimulus is on its way, and this will have a significant impact in supporting those hit hardest in our communities. Yesterday, China reported that they’ve seen no new cases of COVID-19, and their economy has begun to get back up and running. There is a light at the end of this tunnel.
I am sure we are all trying to wrap our heads around our new reality as we adapt to this new normal. As a team, Destiny Capital is heartened that we can be a resource and provide guidance to our trusted clients and partners during trying times like this. We will continue to provide information about COVID-19 as new data emerge and as circumstances evolve. In the meantime, please remember to try and find some joy in each day. As was mentioned in previous communication – we are all in this together. We will get through this together as a community, and please know that we are here to support you in any way that we can.
Have any questions? We’re here to help!