The Other Side of the Covid-19 Curve

We all know we are heading into the teeth of this outbreak over the next few weeks and a lot of what happens next hinges on how governments and society have responded.  I do believe that the social and government responses are taking effect in varying efficacies, albeit less than I would have preferred.  Todays article isn't about the responses to Covid-19, but rather the market afterwards.  We will get to the other side of the Covid-19 curve as surely as time passes.

By examining the '08, '01, and crash of '29; we can see that these market declines can be characterized in the 3 broad phases.  At this point, there's no reason not to use this as a guide to how this decline will unfold.

Phase 1:  The Panic (short and violent)
This is where we are now.  As I wrote last week, I don't believe the market can find firm footing until main street is flushed with a US Dollar cash infusion.  As it stands today, the stimulus bill was not passes.  (reminiscent of TARP in 08 which did not pass on the first attempt)

Phase 2:  The Relief Rally (2 or 3x the duration of the panic)
Once we get to the other side of the Covid-19 curve, we should see a sharp snapback rally.  This will be fuelled on the thesis of low rates, stimulus money flooding the system and ultimately boosting stocks as again - being the only game in town.  Most importantly, technical and momentum traders will push it up high and fast.  (an over shoot to the upside)  Typically, this is a

Phase 3:  Reality Sets In (months or longer, depending on the damage to the economy)
In this last phase, fundamental investors will slowly gain clarity on earnings.  A new "lower - for longer - earnings" could easily develop as we enter into a period of containment of Covid-19.  That is, many of the social distancing practices which impaired the economy will stay in place.  Travel and leisure will not rebound for a long period of time as we "flatten the curve" and require a longer than expected period of containment protocols.  It is at this phase, where fundamental sellers will act as a counter force to the bullish traders in phase 2.  We should see a another leg down to test the lows as earnings estimates begin to reflect the new reality.  Depending on the damage to the economy and the effectiveness of the stimulus, we could see beginnings of a recovery ('01 or '08 scenarios), or worse yet - a slow decline into a longer lasting global recession ('29 scenario).  A catalyst for a global recession (vs a recovery) potentially could be a shifting societal demand to correct the imbalances between capital and labour - likely in the form of various taxes (a topic for another day).

Over the next few days/weeks, I will outline my thesis on the sectors, themes and individual companies that I believe will outperform in the months and years ahead.

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We will get through this and because of that truth, we must plan for it.
Risk Manager Jeff