The leaders of countries, corporations and even households have Shakespearean dilemma in front of them: To Open, or Not to Open! With phrase "To be, or Not to be", Prince Hamlet contemplates death and suicide, bemoaning the pain and unfairness of life but acknowledging that the alternative might be worse (source: Wikipedia). Leaders (and every one of us) have same dilemma of whether it's safe to open the economy and reduce the hardships billions of people (from small businesses across the world to migrant workers in developing countries like India) are going thru or keep the extended lockdowns/shelter-in-place to control the spread of COVID-19 to flatten the curve of infections and unfortunate deaths. By no means it's easy decision same way it was not easy for anyone to lockdown countries and shut down economies at expense of livelihood of billions of people. The most important decision for many leaders in their lifetime will decide how world emerges from this pandemic. So let's look at steps to be taken and possible ways World could be open!
Steps to be taken to open the world:
- Testing, Testing and More Testing - this is one way to assure people that COVID-19 spread is contained and it's safe to go out. Testing will come in multiple forms - test for infection, testing for antibody, temperature checks. Be ready to get tested before you enter your company's premises, restaurants schools or theaters.
- Cure - Cure for people who gets seriously ill so they don't die. Preferably at home cures would come out so health-care system can cope up if and when COVID-19 comes back. Fortunately there is some good news about effectiveness of Gilead (GILD) drug. Hundreds of bio/pharma companies are rushing to find treatment and governments are expediting trials and approvals
- Vaccine - The ultimate solution would be vaccinate billions of people in world. Here again tens of companies are working furiously. Moderna (MRNA), J&J seems to be in forefront of trials. Vaccine for front-line workers could be available by Fall and for rest of world in about 12-18 months
- Habits - During this crisis, people learned about some basic hygiene habits such as washing hands, covering their face as needed. The businesses are taking extra steps to make sure that social distancing can be maintained. These trends would need to continue when world slowly opens up
- Government Support for People in Need - Most of the countries are taking steps to help their citizens and businesses in need to help them tide over this crisis. US has been most aggressive in this regard ($2.3 trillion stimulus and one more in works, US FED taking extraordinary steps) to make sure that economy gets back its footing on other side of this pandemic crisis
With these steps, there is some hope of green shoots as spring progresses. If the flattening of curve continues and unfortunate deaths come down significantly, its likely that we would see world starts getting back to semi-normal in summer (July) and 70-80% by Fall. We all hope that by year end, world would be back to normal and start new year (2021) with hopes of rebuilding the New World!
What it means to stock markets? If you were on different planet and just look at Nasdaq, you won't even notice what happened in 2 months (Feb 19 to Apr 19). Nasdaq is down by less than 4% YTD. Can you believe that? Even S&P is down by "just" 11% YTD. Why? When unemployment claims are over 22 million in 4 weeks and GDP would be down by over 20-30%, why there is so much "irrational exuberance" in markets? As we know, markets are leading indicator of economy by 6-12 months and most of the times market participants are optimistic for long-run. Markets are positioning for the prediction that world would come back to normal in Q4CY20 which is 6-9 months away. If you believe in this hypothesis, where should one invest? Here are my recommendations (as usual disclaimer - do your own research before investing). I plan to only recommend ETFs since individual stocks could be very risk. The theme is BEST:
"B" - Banks (XLF) and Biotech (XBI)
"E" - Energy (XLE)
"S" - Small cap (IJR) and S&P 500 (SPY). I wanted to add "Stay at Home" but there is no such ETF yet!
"T" - Technology (XLK)
Since markets are already close to its full valuation given the onslaught of negative earning news as well as unemployment, be patient and invest on recurring basis over few months to cost-leverage.
Earth Day is in next week (Apr 22). The only good thing which came out of this crisis is to reduce air pollution in most of the world. After all pollution is the silent killer with over 7 million deaths every year. So on 2020 Earth Day, let's take a pledge to change our habits to help flatten the curve of air pollution and save our beloved planet we all call "Mother Earth"
Happy Earth Day!
/Shyam
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