A character in an Ernest Hemingway novel once said that bankruptcy happens “two ways: gradually, then suddenly.” This is how we have experienced Covid-19. The question now is, how soon can the economy be restarted? Wall Street will not find its bearings until we get some idea about Main Street. Here is a stab at what it will take.
First, we need to see the infection rate peaking. Bill Gates says the country needs three things today: a total shutdown, a dramatic increase in testing both of symptomatic and asymptomatic individuals and then a data-driven analysis of the testing to see where the hotspots are, where future hotspots are likely to be and who has developed resistance that may eventually lead to herd immunity. We have been woefully behind the curve on testing and getting results back quickly and have had at best only a haphazard plan for analyzing those infected.
A second thing we need before the economy can get restarted is stimulus to allow businesses to survive and employees to stay afloat until paychecks start up again. Here there is reason for optimism. The government moved quickly to pass the $2 trillion stimulus package.
And the Federal Reserve has been most impressive. Mr. Powell and the Fed have said in no uncertain terms, we will be the backstop. Not only will we lend to U.S. banks here and central banks abroad, but we will lend directly to corporations and states and municipalities if necessary. Impressive.
Finally, the stock market needs to see progress in the search for a vaccine. This is a work in progress but early signs are very encouraging. The U.S. is a creative economy. Many vaccine studies have already been announced and some are underway. Antibody tests are in the works and if rolled out quickly could identify who has recovered from Covid-19 and who has developed resistance.
So these are three problems that need to be addressed to get the economy and the stock market going again. Progress on two of the three is encouraging. Of course, the most important hurdle is controlling the virus and on this, April will be the important month.
Are stocks cheap now? Well the one thing we can say is they are cheaper than three months ago. Could they go lower? Definitely, but as Robert Shiller, the Nobel Prize winner noted recently in The New York Times, the most important thing is not stock market fluctuations but to make sure that stocks are not such a high percentage of your assets that you just can’t sleep at night. Asset allocation matters.
Patience is a virtue today. This is not the apocalypse (see chart below). Institutions will survive and our world will endure and go forth. As Queen Elizabeth counseled England recently, exercise self-discipline and “quiet good-humored resolve.”