Investing in the Midst of a Pandemic

May 2, 2020 — Leave a comment

Quiz!

When are stock returns highest on average?

  1. When the world economies are strong, and investment sentiment is positive.
  2. When stock valuations are at an extreme low, reflecting a grim economy.
  3. When stock valuations are high, and uncertainty is high.

Investing in the Midst of a Pandemic

The coronavirus pandemic brings substantial uncertainties. While the instinct is to wait for clarity before investing, the biggest returns tend to come starting at times of greatest uncertainty. This was true in past declines, and the current one is no different. On 3/23/2020, stocks hit a bottom with no clarity on the timeline for the world stopping the spread of the virus, and no clarity on how the world economy would survive social distancing. A moderate reduction of uncertainties led to phenomenal gains in stocks. As additional uncertainties get resolved, there is a chance for additional gains. This article refers to the coronavirus – as always, additional negative and positive surprises may appear, leading for ups and downs, beyond the uncertainties listed below. In addition, investors expect economic pain from the social distancing, and this may be reflected in stock prices too little or too much. Here is the timeline so far and potentially looking forward.

Past:

  1. Around the bottom, central banks and governments announced substantial support for economies, including the Federal Reserve using the term “unlimited support”.
  2. Over time, we saw the number of daily new cases in many countries level off, and in some cases, revert. This gave some comfort that with social distancing, the virus could be contained in a reasonable timeline.

Future:

  1. Additional central bank & government support until the end of the pandemic’s economic impact.
  2. Increased testing, to allow quick isolation of infected people. A lot already happened, but more is needed.
  3. Increased contact tracing, both automated and manual, to isolate people who got in contact with infected people. Automated solutions are being developed. There is currently substantial hiring for contact tracers. My understanding is that a lot more progress is needed on this item. This is a good example of creating reemployment to help with the effort to end the pandemic.
  4. Transition from level and fewer daily new cases, to a worldwide reduction in total cases, so fewer people will be able to spread the disease.
  5. A potential die-off or weakening of the virus, as eventually happens with some viruses.
  6. Treatments to reduce the severity of the disease.
  7. Widespread vaccines.

Key Point: The intuition of many investors is to wait to invest in stocks until uncertainties are removed. This leads them to invest at times with much higher risk of long-lasting declines. If you have enough resources to weather substantial declines that are always a possibility with stock investing, you may be lucky enough to invest at a time that can both help your returns as well as prepare you for future cycles.

Quiz Answer:

When are stock returns highest on average?

  1. When the world economies are strong, and investment sentiment is positive.
  2. When stock valuations are at an extreme low, reflecting a grim economy. [Correct Answer]
  3. When stock valuations are high, and uncertainty is high.

Explanation:

  1. A strong economy with positive sentiment can lead to gains for a long while, but is also reflective of peaks in stocks.
  2. When the economy is in poor shape, and valuations already reached low levels, people already sold a lot. The declines may continue for some time, but eventually a turnaround comes, and some of the strongest stock returns may begin.
  3. High uncertainty along with high stock valuations could sometimes lead to gains and sometimes losses. The high valuations sometimes mean that not enough selling was done to reflect the uncertainty.

See article above for more explanations.

Disclosures Including Backtested Performance Data

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Gil Hanoch

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