Why is COVID-19 Like a Lily Pad?

Thankfully, COVID-19 finally has everyone’s attention. Why “thankfully”? The coronavirus is like a single lily pad in a pond. Assume a lily pad replicates itself every two days. How many days before the pond is covered in lily pads? 47 days. And for the first 40 days, you don’t even notice the lily pads.

The pandemic spread of COVID-19 can have exponential growth. Its doubling effect (Every day? Two days? Four to five?) and its resulting trajectory can massively change the scope and duration of its impact on our lives and on the economy.

Let’s pray that governmental policy decisions and actions we take as citizens are successful in blunting the course of the virus as a contagion.

We all have a crystal ball that predicts the future prices of stocks. It’s called the stock market. The stock market is telling us we are in a recession, that the financial impact on companies and consumer spending resulting from “social distancing” will negatively impact earnings this calendar quarter and next. The current thrashing in the market is a result of investors prognosticating when the economy will start to recover. We believe that the market currently contemplates a scenario that economic recovery begins in the Third Quarter. If it happens sooner, the markets are oversold. If the recovery is pushed out to the Fourth Quarter or farther? Well, the markets have yet to fully discount this scenario.

And like all forms of divination, the stock market can get it wrong, or will yet forecast an entirely different scenario—particularly if efforts to curtail the spread of COVID-19 fail. Unfortunately, we are operating in unchartered waters.

It’s not that we haven’t seen “black swan” events like this pandemic before. Remember the Financial Crisis of 2008 and 2009? The S&P 500 lost 55% of its value over 16 months from October ’07 through February ’09. The “COVID-19 Crisis” is not yet 30 days old, and we saw the market this morning at one point down 30% from its peak!

What lessons did we learn from that Financial Crisis?

  1. Once we become aware of the “lily pads”, the market will have already declined significantly. Attempts to “time” the bottom almost always fail. It’s often best to “ride it out”.
  2. Markets do recover. The stock market is forward-looking, and it attempts to discount the impact of certain events 3-6 months into the future. Well before evidence that a crisis has abated, the stock market can price that fact in, and the market can turn upwards—and quite rapidly.
  3. The federal government can play a significant role in jumpstarting the economy. Specific to the COVID-19 Crisis, anything the federal government does to mitigate the spread of the virus combined with efforts to stabilize the economy (i.e., stimulus packages, quantitative easing, accommodating interest rates, etc.) could foster a quicker rebound when we emerge on the other side of this crisis.

What are we doing at NWCM?

  1. We are meeting every day to discuss the appropriate actions to be taken in Client portfolios based upon the latest information available
  2. We are evaluating “trigger” events to rebalance portfolios, the effect being that Clients’ stock allocations get closer to their target allocations.
  3. We are evaluating current securities within portfolios to determine if we want to own them during the recovery. And if not, we will be selling them.

Most of all, we are taking Clients’ calls and answering questions about their portfolios. And accepting instructions to do other than what we have outlined above.