After the jaw-dropping 35% decline in the markets from February 19th to March 23rd, the stock market rebounded over 22%, including one of the best weeks in recent memory.  Could this be the start of the much-hoped-for V-bottom recovery?  Is the Coronavirus-induced bear market over?  Moreover, how bad is the economic fallout going to be from the social distancing and business shutdowns?  Let’s tackle these one at a time.

First, it is highly unlikely given the lingering uncertainty about the Coronavirus and the economic shutdown to expect a V-bottom recovery.  It seems more appropriate for the recovery to come in the shape of a W-bottom, with multiple retests of the lows in between powerful, short-term rallies, like what we have just witnessed. Extreme volatility is here to stay, at least in the near term, driven by positive and negative news related to COVID-19.

Social distancing may be working…  Second, while there are increasing signs that the rate of growth of infections is slowing, it is too soon to declare victory.  As the world listens to Dr. Fauci and other health experts, we can share a glimmer of hope, but we must remain vigilant in terms of following their guidelines to mitigate the spreading of the virus. 

But at what cost?…  Herein lies the most difficult question, and one with no clear answer at the current time.  The pressure to reopen at least part of the economy is growing by the day.  So is public frustration with politicians who see the opportunity to take over more control of everyday life, whether driven by good intentions or an insatiable thirst for power.  Let me be clear.  In crisis, we all expect and want the government to step up to the plate and do what it can to overcome the challenge at hand.  However, we also expect government not to go too far and let us get back to a normal life once the challenge has been defeated.  It’s a difficult balance and unfortunately, imbalances have consequences.         

The process of trying to get the balance right, is likely going to take the rest of this year, if not longer.  There will be periods when government initiatives have largely positive results and other periods when the opposite occurs.  It’s just going to be a volatile process.  Then, lest we forget, there is an election in seven months, which could upset the apple cart as well. 

How to invest in uncertain times?…  Underlying valuations for most companies will be much more stable than their stock prices, which will be battered by positive and negative developments related to the pandemic, as well as government initiatives.  Patience and valuation discipline will be critical to take advantage of this extreme volatility. 

Earnings season has arrived…  Generally speaking, earnings expectations are very low, and we expect conservative guidance for the remainder of the year.  It will be interesting to see how the market will react to lower earnings and any reductions in guidance going forward.  Everyone understands the economic shutdown is going to be a stiff headwind for corporate profitability, so it is not out of the realm of possibility to see some positive earnings surprises.  We are not expecting positive surprises to be widespread, but if a few bellwethers surprise on the upside the market could rally sharply.

Businesses are retooling…  Businesses large and small are retooling.  Non-health care manufacturing companies are finding ways to produce personal protection equipment that is currently in great demand.  Companies are rethinking their supply chains hoping to become less dependent on China.  Restaurants are trying to survive by offering delivery and curb side pickup.  My point here is that America is responding to the pandemic in multiple ways.  Before COVID-19 arrived on the scene, America may have been complacent.  Why wouldn’t we be?  Life here for most of us was pretty good.  Now we realize we are all in this together.  Well, maybe politicians haven’t realized that just yet, but they are followers, not leaders.  The real leaders are leading.  They are our doctors and nurses, small business owners, neighbors and volunteers, and individuals in all walks of life doing the best they can to stay healthy and help others in need at the same time.

Everything we do to stay healthy and every creative way we find to help others matters in this battle.  The much-needed unification of our country is starting.  We have a long way to go, but this is a really good thing.       

 Michael Kayes, CFA

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