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COVID-19 and investing III

2020-06-23, Michael Thompson

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COVID-19 and investing III

Investments are doing well. The curve was flattened, restrictions are easing, and many companies are reopening. The US jobs report for May beat all expectations I’m aware of. The S&P 500 has recovered to within a few percent of all-time highs while the NASDAQ is at an all-time high. The sharp recovery many investing experts predicted may indeed come true, but it’s not time to pop the Champagne bottle.

Many of the economic and investing experts who predicted a sharp recovery also assumed a second wave of COVID-19 and only predicted full economic recovery in 2021. Indeed, attempts to ease restrictions around the world have been followed by spikes in COVID-19, threatening many investments.

As usual, news headlines have been sensationalized. We’ve seen headlines stating that young healthy kids are dying from COVID-19, only to find out the article was referring to a single overweight kid with diabetes. We’ve also seen overly positive headlines claiming, “a vaccine is ready.” Our technology is of course better than ever, but no vaccine has proven effective for COVID-19 to date and, historically speaking, promising early vaccines rarely pan out. As of a few weeks ago, about 60 drug and 40 vaccine trials were underway.

Other headlines have claimed that COVID-19 mutations will nullify any vaccine and even produce the deadliest disease known to mankind. While there is a small chance of the former and an even smaller chance of the latter, this is unlikely. COVID-19 is indeed mutating quickly, but that’s a double-edged sword. The lion’s share of mutations won't impact a vaccine and will hurt the virus (and help us).

Gold bugs have made headlines predicting mass inflation, the same predictions they’ve echoed for years. However, experts predict the opposite in the short term. Indeed, recent numbers seem to confirm that reduced demand from higher unemployment and COVID-19 fear is driving prices down. However, if demand picks up sooner than expected, above normal inflation could follow.

Investing Going Forward

While a second wave may be forming in the US, it’s likely officials will error towards keeping businesses open going forward. The hope being that better mask use, social distancing and hand sanitizer use will keep the virus under control until a vaccine arrives. It's not yet clear if this will work. It will maintain an unfortunate death rate and won’t save all businesses. It’s unlikely that business requiring dense crowds for profitability (e.g. concerts, mass transit) will achieve pre-COVID revenues for years. Government actions may or may not keep such businesses afloat.

What does this mean for our investments? From this context equity markets appear slightly over-valued. Expectations are for roughly 7% annual returns in the coming decade for US equities (9% for ex-US). Treasury bonds may struggle to keep up with inflation going forward. As usual, we don’t want to bet much on market timing. In our late March COVID-19 article, we stated it might be a good time to rebalance to equities if you’ve become underweight. The opposite may be true now, in case you’ve become overweight in equities.

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