The investing implications of this ongoing global pandemic are many. We will get through this and there will be plenty of opportunities. My overarching message right now is to get (and stay) in a safe financial (and physical) position to be able to take advantage of them when they do.
Think back to the Great Recession. You didn’t need to be the first investor to buy into the market when it started to rise, or to pick up attractive real estate that had plummeted in value. You just had to be in position to do it when the big-picture trends started to improve, and then act.
As for ideas on what to buy right now, next week, and next month, some reflection on the current state of the world is in order.
Most businesses out there should be working through some semblance of worst-case, base-case, and best-case scenarios for how this whole thing is going to play out and affect them. I’m trying to consider those across various end-markets and translate my thoughts into a high-level investing strategy.
It’s not an easy task. We need to try and layer in certain factors for end-markets and individual companies, including (but not limited to): (1) degree of impact/benefit to core business operations, (2) cash and/or access to capital, (3) time, (4) potential impact of government bailouts, (5) population acceptance/adherence to somewhat authoritarian measures, (6) collateral damage from unexpected financial collapses, and (7) acquisition potential.
Stepping back from stocks for a minute, the main priority for the country (and world) right now has nothing to do with spurring economic activity. Quite the opposite, in fact. We need to tamp it down.
As more people are starting to realize, the immediate goal is to limit the spread of this virus by keeping people away from one another. The point here isn’t to freak people out about a virus that for most is not life-threatening. It’s to try and ensure that the healthcare system can handle the expected surge in patients that are at risk and will need help, and to try and protect front-line medical professionals, without whom the healthcare system is truly at risk.
In other words, it’s not about saving the economy right now. It’s about saving lives and the healthcare system. The economy will rebound once this primary goal is achieved.
Absent a vaccination, which we will get in due time, physical separation for several weeks is the best way to slow the spread. If everyone follows the rules this could be mostly over and done with soon. Then the occasional flare-up can be tamped down with the same measures.
On the other hand, if citizens don’t adhere to seemingly strict measures and the healthcare system gets overwhelmed the social and economic costs will be far larger, and the duration of this crisis will be much longer.
Considering Best-, Base- and Worst-Case Scenarios
With that all said, here is my current thinking on best-, base-, and worst-case scenarios. This isn’t meant to be comprehensive, freak anybody out or be overly intellectual, it’s just some high-level thoughts to help us stay on track with so much information coming at us, and such a volatile and potentially depressing stock market (for now). Please keep in mind, I reserve the right to change my mind quickly! As things evolve so too must our thinking.
People do as they are told and stay away from one another for the next three weeks or so. In the most affected places where the steps taken seem draconian, people still follow this advice. Private companies, citizens and the government step up to make sure essential items and services flow quickly and freely. Healthcare organizations are able to adapt quickly to give appropriate care to those in need.
Supply chains for the big consumer goods companies, grocery stores, medical supply companies, etc., adapt quickly to support the lack of foot traffic and help people stay home without concern of running out of food, medicine, etc. Smaller businesses do curbside pickup and delivery. The government bails out small businesses across the country so people have jobs to come back to.
Widespread testing for COVID-19 ramps up over the coming weeks and the government, media and social media outlets help people understand that the following surge in positive cases is reflective of more testing, not imminent doom. It’s just numbers, guys; the more people that get tested the more results that will come back positive, at least in the short-term.
The stock market is able to stay open without interruption, markets begin to factor in all of the above and, true to its typical forward-looking form, the stock market stabilizes and begins to recover relatively soon. Business, consumer and investor confidence begins to rebound as people see that the steps we’ve all taken are actually working.
In a base-case scenario, just about all of the above fails to play out as well as described, but it’s not total chaos either. Too many people fail to follow what’s arguably the easiest advice ever uttered – just hang out away from other people! – resulting in more pockets around the country where extreme measures are required. This all means it takes longer to contain the virus, more people get sick, there’s a greater loss of life, it’s harder to get essential goods and services to people, the economy takes longer to recover, etc. The stock market closes for a period of time, which freaks people out, but it doesn’t last long and bounces back to a rational level when it re-opens. When it’s all over, the general consensus is that it still could have been a heck of a lot worse.
I’m an optimist. Let’s not talk about a worst-case scenario!
To state the obvious, in all scenarios there’s not a ton of incentive to rush out and buy big positions in a lot of stocks right this minute. There’s still just so much uncertainty. But starting to take small positions and/or add to existing positions if you have a long-time horizon can make some sense. Considering these various scenarios, there are some basic and rather obvious investing implications:
It’s not a great time to be buying hospitality, airlines, travel, restaurant, and retail stocks, unless you have a longer time horizon and/or are relatively confident in a successful bailout.
Energy and alternative energy are also tough to justify. But one could argue that solar could be an eventual bright spot once things improve and demand for more distributed energy, and energy independence, rebounds.
Consumer staples and grocery chains are likely to outperform and are relative safe havens.
Select cloud software stocks and cloud infrastructure stocks could rebound/perform relatively well given their ability to support work-from-home in the short-term and longer-term, the trend toward these types of solutions stays strong for all the same reasons it was before this, plus the added incentive of helping businesses & consumers during viral outbreaks. As always, end-market exposure matters.
Select online and internet businesses outperform for obvious reasons. For those dealing with physical goods, while some supply chain hiccups take time to address, they gain market share, and keep it, when things return to normal.
Medical device, supply and biotech stocks with select exposure do well.
What To Do Now
It’s time to be calm, measured and patient. Nothing is going to change for the better overnight. It’s time to look for opportunities to reduce exposure to stocks that aren’t likely to work, and start building positions (slowly) in those that are more likely to work.
It’s important to look beyond tomorrow, next week, or even next month, unless you’re a trader. These are the times when huge opportunities start to surface. Having the clarity of mind to recognize them and act is a challenge, but I’m confident we can succeed.