In the midst of COVID-19, this year has presented many moments for us to reflect upon our health, our work, our human connections, and life in general. Six months ago, it was unimaginable that a novel virus could cause modern civilization to nearly stop on a dime. We have been humbled by mother nature and the idea of what was permanent or certain in our lives has been tested. This experience certainly challenges us to take a few steps back and look at the bigger picture in terms of life and our priorities. But despite these challenging times, the world will adapt as we always have, and this too shall pass.
The COVID-19 pandemic has no doubt created unprecedented times and much uncertainty with respect to our health and the global economy. Countries and governments around the world are having to balance between public health and the economy. It is natural to feel some level of discomfort investing in the current environment given the amount of uncertainty we are facing. Indeed, we are in a global war against a novel virus that the world is not well equipped to fight. Many lives have been lost to COVID-19, millions have lost jobs, businesses are at risk of shuttering, the travel and entertainment industries have come to a halt, and our social lives have been put on pause. There is considerable uncertainty about the duration and severity of the pandemic, including hotspots such as Brazil and India, a resurgence in several U.S. states (Florida, Arizona, Texas, California, and Georgia), and a potential second wave in the fall. Under these circumstances, it is easy to focus on the negatives, extrapolate forward, and formulate a pessimistic case for the markets.
Despite the dire state of the global economy, the market is not the economy. They are related, but not the same. The economy reflects the current reality, whereas the market is a probabilistic, forward-looking mechanism that balances both negative and positive aspects of the future. To have a balanced viewpoint, we must also consider the positives going forward.
So, what could the market be seeing as the positives?
- A record amount of monetary and fiscal support from governments and central banks around the world is buying us time, while COVID-19 vaccines are being developed. As long as governments and central banks are willing to do whatever it takes to support their economies, the market will have a counter force against economic shutdowns.
- COVID-19 vaccines are being developed at record pace, with several vaccine candidates (such as Moderna’s mRNA-1273) entering phase 2 or phase 3 human trials in the second half of 2020. Dr. Anthony Fauci reiterated recently that based on current trial data, a vaccine is expected to be available at the end of 2020 or early 2021. The goal is to have multiple vaccines available to address the enormous demand globally.
- While vaccines are in development, therapeutic drugs, such as Remdesivir and Dexamethasone, which have been proven to be relatively effective in lowering case fatality rates and reducing recovery times, are being used to treat COVID-19 patients currently.
- Economies are slowly reopening in stages, giving rise to improving economic data. In particular, Asia and Europe have contained the coronavirus relatively well and are seeing economic activity normalize. The market tends to do well when economic data goes from very bad to less bad. Realistically, the reopening process will be a two-step forward, one-step back scenario as we monitor, learn, and adjust to the new normal.
- Market data indicates that a lot of cash is still on the sidelines and many institutions are underweight equities.
- Sentiment surveys show that many investors are not believing in this rally and are still bearish, which is often a contrarian indicator.
After experiencing the fastest bear market in history in the first quarter of 2020, financial markets, particularly in North America, produced the fastest recovery on record during the second quarter on the back of extraordinary stimulus and support from governments and global central banks (i.e. cutting interest rates and injecting trillions of stimulus money into the economies). The fact that the markets have been able to recover much of the decline in such a short period of time is telling us to keep an open mind for a better than expected future.
Please keep well and stay safe!
Ethan Dang, Portfolio Manager