We are currently in the relief rally phase which I think will take some time to play out. This phase should end with a decline in volatility.
U Bottom vs L Recession
It's worth analyzing the factors that support the U vs L scenarios. Personally, I believe the odds of the L scenario (global recession) outweighs the U scenario 2:1 (or about 67% favouring a L scenario). While I can make the case for both, I find the L scenario more plausible.
U Bottom
QE/2T+ stimulus: It would seem that authorities have learned a lot from the credit crisis and have leapfrogged ahead of the curve with massive stimulus. Don't fight the Fed.
Antivirals and Vaccines: With global efforts of really smart people working to combat the pandemic, it is possible that antivirals/antibody therapies capable of treating Covid-19 are discovered.
Antibody testing: This isn't the usual test that is being talked about, but we have to start to get a handle on people that have already had Covid-19 and have developed antibodies. This could allow more people get back to work, but I have yet to hear any significant progress in deploying this at scale.
L Recession
Rolling infection waves: While individual regions are able to somewhat predict when they will have peak Covid-19 cases, they have yet to address how to contain Covid-19 afterwards (safely sending people back to work). As one area becomes contained, breakouts occur elsewhere which ultimately result in a continuous flow of outbreaks. China itself, admits to having challenges now dealing with imported cases. Worse yet, there STILL seems to be regions that are not taking the pandemic seriously. I believe this is human nature - that the majority of the population will not respond until it directly affects them. If this is true, then every major city (and country) needs to have its "New York" or "Italy" moment.
Demand destruction due to fear: Assuming we can deal with the above, getting people back out to spend will prove to be a challenge unless there are effective treatments and a vaccine. Even with QE/2T+, there's no amount of money sufficient to get the population to wade back into murky waters with a hungry Covid crocodile still on the hunt.
Vaccine 12-18 months out: A vaccine is sorely needed. However, by the industries best/optimistic estimates, it is still at least a year out. This includes testing for efficacy, safety, manufacturing and distribution.
Re-Pricing of Risk: I think this one is particularly important for the markets, but rarely discussed. The outcome of the 08 recession was a repricing of credit and safeguards placed on the banking system. The result of the Covid-19 recession, will cause a repricing of supply chains, placing safeguards on the manufacturing of critical supplies. This includes very basic commodity products (aspirin, masks, components parts). This inherently adds cost into the system and furthers the breakdown in globalization.
Regarding these two scenarios, it's important not to get too rigid into one particular belief. Remain open to new information as its presented. With respect to investing, use the current relief rally to exit any stocks directly in the Covid-19 blast zone.
I'm still thinking through a longer term investment thesis, but there are four broad themes I'm confident in today.
High Yield: (Be careful with dividends - assume cuts and changing consumer behaviours)
Growth Mega-cap: (Scale matters, and Mega cap stocks will inevitably take share)
Leap of Faith stocks: (looking through the Covid-19 valley, life resumes. Humans are social creatures of habit. We eat, shop and seek entertainment. Some stocks offer tremendous value if you have faith that life goes on)
Gold: (massive stimulus isn't unique to the US)
Risk Manager Jeff
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