A Tough, Mean and Tricky Enemy?

The more we know about the coronavirus, the more we realize that we do not and cannot know enough, at least until we reach the HERD immunity level (about 60% of the population infected), and/or we get an effective vaccine that can prevent infections, or treatments that can mitigate the mortality rate of the disease.

Conventional wisdom speaks of the advance of the virus in “waves.” Experts anticipated the initial wave (110,000 deaths and counting) being followed by a resurgence in the fall, converging with flu season. After that, perhaps, THE VACCINE would arrive and, therefore, by next winter we could be out of the woods. IPSO FACTO, stop worrying. The economy will recover; jobs will return quickly; and the economic/financial system will be back on track. That is surely what Trump needs/wants us all to believe to get him reelected. It’s also what we all hope will come to pass.

But reality is already challenging those hopes. Premature re-openings, particularly in “red” states, have led to a surge in new infections – in several states, hospitalizations are ABOVE the pace encountered in the initial wave. Overall 14 states are seeing their infection rates increase.  Warm weather, moreover, has done little to slow the spread. In short, the second “wave” is already upon us. Indeed, one Harvard scientist now projects an additional 100,000 deaths before September.

We must also bear in mind that there may never be an effective vaccine for this virus. While experts are optimistic, science isn’t based on hope, and there are simply no guarantees that the existing candidates will meet the safety and efficacy standards required to approve a vaccine. Even if we find one (or several), the logistical challenges of manufacturing, distributing and administering vaccines to a global population of 7 billion have never been encountered before, and are likely to ensure a long wait before a vaccine reaches the public.

Finally, this virus continues to mutate. So far, the changes have been insignificant, but a mutation that increases either the mortality rate or the infection rate has the ability to make the virus exponentially more dangerous than it already is – and could in one fell swoop render any vaccine ineffective.

Where does that leave the country, already reeling from a horrifying death toll and the ensuing economic collapse?

HEALTH: The best-case scenario is more of the same – face masks; social distancing; limited travel; remote work, etc. More likely, geographically-centered “spikes” in infections will cause numerous, more-limited shutdowns, with concurrent economic impacts.

JOBS: More innovation and dispersed work will become the norm for many knowledge workers; service workers, agricultural workers, and other vulnerable populations won’t have any choice but to show up at work – risking the health of themselves, loved ones and fellow employees.  Production of the ‘essentials’ will continue, with only modest, localized disruptions.

THE ECONOMY: A continuation of double-digit unemployment rates like in the 1930s is virtually certain. And we haven’t yet seen the full impact of the first wave of coronavirus. Lots more bankruptcies are likely, and low interest rates alongside very volatile public equity markets will pose a challenging investment environment, possibly for years.

In these circumstances, the priorities, from an investment perspective, must be to (a) safeguard existing assets and (b) ensure one is well-positioned to take advantage when the course of the virus and the recovery become clearer (possibly 2021), or when herd immunity takes effect – likely two to three years from now.

That requires having as much liquidity and flexibility in your asset mix as possible. There is a risk that you will get itchy and jump in too early. So, be sure you have enough flexibility, liquidity and courage to jump back in more than once!

In a world where debt instruments return close to zero, the game is more about NOT losing money than earning yield. The only serious risk would be sudden, runaway inflation, which for the next several years until the virus is long gone is not a major risk.

Bottom Line: excessive liquidity and flexibility is both the safest and most optimistic course to follow!