“Trends in a Post-COVID World”

Where is the stock market going from here?  Why has the market recovered so quickly?  If we don’t find a vaccine for the virus soon, will we see a huge drop in the market?  These are all common questions we are getting from clients and also seeing others ask in the media.  The short answer is that nobody knows exactly what the next months and years will bring, but we are starting to see some hints at what a post-COVID world could look like.  Based on what we know today, here are a few broad headlines that we think will continue to take shape in the coming weeks, months, and years.   Different response shapes If you’ve read an article on the economy in the last 4 months you would have seen alphabetical interpretations of the economy’s recovery labeled as a V, U, W, or L.  Most of the time, these recovery shapes are linked closely to how the virus is being contained (or not) as we tend to believe the market and the virus should move in sync.  The reality, however, is that we are starting to see very different response shapes emerging for the economy when compared to the virus.  If the stock market is any gauge of where the general public believes the economy is heading, then it seems fair to say we are in a “U” shaped recovery of sorts.  As of the middle of July, the S&P 500 and Dow Jones have gained back “almost” all of their original losses and certain spending and housing indicators are showing strong signs of improvement.  The virus, however, seems to be taking more of a “W” shaped response.  This second wave of virus spikes could very well lead to a short-term improvement (or slowing of spread) followed by third and fourth waves of infections.  In short, the virus is still very much an unknown entity, and until a long term solution is in play (or it becomes more normalized) then the path the virus takes could look very different to the path the economy is on.   The Big Will Get Bigger Smaller companies and mom and pop retailers are getting hit incredibly hard from the economic fall out of the virus.  Sure, many small companies had access to government aid through the PPP program, but those funds will soon dry up.  For larger companies, it seems the inverse has been occurring.  The large tech giants seem to take more and more ground daily and those who are doing it with a digital footprint are faring the best of all.  You only have to look as far as the NASDAQ (up over 17% YTD) to see how companies with a technology heavy focus are faring.  As shown in the chart below, e-commerce growth has been very steady since 2010 and shows every indication that it will continue on this trend.  Additionally, there are certain arguments to be had that the growth will now be even quicker with more people working and operating from their home base.   Lower for Much Longer A final trend that was already developing before COVID, and has certainly accelerated since the onset, is the continued decrease in interest rates.  The Federal Reserve lowered rates drastically, 30-year mortgage rates are the lowest they have EVER been since being officially recorded, and rates that you can now earn on your savings at the bank are laughable.  While the economic recovery seems to have begun, the interest rate environment is likely to remain low for the foreseeable future.   The Federal Reserve will want to see many quarters (if not years) of consistent and predictable growth before they even begin thinking about increasing rates again.  For investors that have historically received their “income” from dividends or bonds, they will begin looking elsewhere.  When this happens, historically stock prices have had a major benefit because they become one of the few places where people can get a return that beats inflation over a long period of time.   There are many unknowns in a post COVID (or current COVID) world, but some of these larger macro trends are slowly becoming more evident.  As always, the patient and consistent investors will come out on top because trying to time this market is not for the faint of heart.  I’ll leave you with this brilliant quote by Warren Buffet himself:   “The stock market is the perfect device for transferring money from the impatient to the patient.”