This week we received a few queries asking when we expect to change our constructive stance on the equity market, more specifically where or when will the time come to sell. The best answer to this question, in our opinion, comes from Reminiscences of a Stock Operator by Edwin Lefèvre (1871 — 1943):
“But if after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should anyone ask for explanations? There are probably very good reasons why it should go down…”
Our more nuanced response to the question, is to watch the gradual re-opening of economies closely both for signs of any re-acceleration in positive COVID-19 case counts and to assess what ‘normal’ economic activity means in a post-COVID, pre-vaccine world.
The Perils of Re-Opening
Texas yesterday announced that it will be putting its re-opening on hold for now.
From the Financial Times (emphasis added):
Texas slammed the brakes on its economic reopening in the face of a leap in coronavirus cases, halting plans to ease lockdown restrictions and banning elective surgeries in its four biggest cities to free up hospital beds.
The order from Greg Abbott, governor, is the clearest sign yet that states in the south and west of the US may be forced to reverse course just a month after giving companies the green light to resume business.
“The last thing we want to do as a state is go backwards and close down businesses,” Mr Abbott said. “This temporary pause will help our state corral the spread until we can safely enter the next phase of opening our state for business.”
The seven-day COVID-19 positivity rate in Texas has risen from a low of 4.27 per cent on 26 May to 11.76 per cent on 24 June. (Starting April, the highest recorded seven-day positivity rate in Texas of 13.86 per cent occurred on 13 April, more details can be found here.)
If case counts in re-opening states rise as rapidly as they have done in Texas recently, hospitals could once again find themselves overwhelmed. Should this transpire, governors will be left with little choice but to reimpose curfews and strict social distancing measures. Suffice to say this will halt the nascent economic recovery in its tracks.
Equally concerning is that it is widely argued that transmission rates for the virus are lower in warmer climes than in cooler ones. With the US election toward the end of the year and the Presidential candidates planning on organising rallies to drum up support for their election bids, there could be flare ups in cases in the run up to the election.
If on the other hand the increase in the positivity rate in Texas is an isolate case or one of a handful of cases, states across the US will relax social distancing measures and take the necessary steps to restart their economies.
The Post-COVID, Pre-Vaccine Economy
In the opinion section on the Bloomberg website there was interesting piece posted arguing that “there is no alternative to conquering the disease if economies are to recover.”
John Authers compares the recent economic performance of Sweden, one of the countries not to have imposed social distancing measures, to that of its neighbour Denmark.
Quoting from the piece (emphasis added):
Exhibit A) lies in a comparison of Denmark and Sweden, two very similar and very beautiful liberal Nordic countries, joined by the bridge from Copenhagen to Malmo, which took very different approaches to fighting the coronoavirus. Denmark opted for a strict lockdown, while Sweden was much more lenient, aiming to build “herd immunity.” So far, Dhaval Joshi, chief European investment strategist for BCA Research Inc. shows that the Swedish approach isn’t working. Looking at consumer confidence numbers, Swedes have taken an even greater hit to consumer confidence than Danes
[…]
Following on from the Nordic example, we now have some more examples coming in from the Sun Belt states of the U.S. Most tend to be politically conservative with Republican governors and have therefore — in the polarized U.S. political environment — opted to reopen earlier and with more enthusiasm than other states. The philosophy behind doing so was to boost the economy. But the evidence from a study by Deutsche Bank AG, using data from Johns Hopkins University, suggests that early reopenings have had exactly the opposite effect. […] The relationship isn’t strong, but there is plainly no economic advantage to an early reopening
[…]
When we do the same exercise for restaurants, possibly the sector most directly affected by Covid, the effect is more dramatic. Governors can make big political gestures and tell people they are free to go back to restaurants, but people won’t go if they are worried this will make them sick
Lockdown or not, the fear factor is sufficiently high that it is unlikely economic activity will normalise prior to a vaccine for the virus being found. Anecdotally, while economic activity in Singapore was higher this past week than during the “circuit-breaker”, restaurants, malls and streets still remain far emptier than they ever were even on the slowest of slow days pre-COVID.
“The only thing we have to fear is fear itself.” — Franklin D. Roosevelt (1882 — 1945)
Investment Perspective
From an investment and portfolio management perspective, a re-acceleration in the spread of the virus can be managed through an above average cash allocation and by continuing to hold securities of companies that benefit from the transition to work from home and increased consumption of home entertainment.
With that being said, we suspect from September onwards and into the Presidential election, any rallies will be opportunities to sell. That, however, is still some time away and liquidity remains abundant. For now, liquidity supersedes all else. We will revisit the topic of when to sell, if and when the liquidity conditions change or in the run to the elections.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.