The COVID-19 Pandemic and the Stock Market

The COVID-19 pandemic is the primary epidemic and the driving force behind the other two epidemics. It has brought global economies to a halt as government officials have instituted shelter-in-place orders and closed businesses.¹ In April, the unemployment rate increased by 10.3 percentage points to 14.7%.² It seems that many hotspots such as New York and California have seen a decrease in the number of new cases while other locations such as New Orleans have seen an increase in cases.³ As governments struggle with how to restart their economies there may be the possibility of multiple waves of virus cases. Prior pandemics such as the Spanish Flu in 1918 have experienced multiple waves of infections.⁴ Some countries such as Hong Kong and Singapore may be experiencing a second wave now.⁵

We believe the possibility of multiple waves of cases means that the virus may continue to depress consumer spending and economic growth. Recently, the Wall Street Journal speculated that, rather than experiencing a hoped-for V-shaped economic recovery (V-shaped = GDP quickly returns to pre-crisis levels) as many had hoped, the American economy may be in store for a “Swoosh-shaped” (named after the Nike logo) recovery. Like the V-shaped recovery, a swoosh recovery also shows an initially sharp decline in GDP. However, the return to pre-crisis GDP levels is a slow, painful one over several quarters.⁶

Given the uncertainty of states’ re-openings, unpredictable consumer behavior in the midst of looming COVID-19 health threats, and the possibility of a resurgence of the virus, we believe that the recent stock market lows should hold, but still anticipate more market volatility in the future.

An Unseen Epidemic: An Economic Narrative of Negativity

We believe the economic and financial pain of this pandemic has spawned a more subtle, yet serious epidemic: an economic narrative of negativity. The idea of cultural narratives that, in turn, influence economic outcomes is one introduced by Robert Shiller in his recent book “Narrative Economics: How Stories Go Viral and Drive Major Economic Events” ⁷. Shiller, who co-created the Case-Shiller home price index in 1991 and won the 2013 Nobel Prize in Economics, theorized that cultural stories or “narratives” are created which circulate through society and influence people’s feelings and their economic decisions. These decisions aggregated across our economy, then drive economic outcomes in ways that cannot be explained by simply analyzing the data on its own.⁸ Shiller also argues that these narratives are repeated through history, manifesting themselves in different ways.

For example, it seems there has been a “Boom vs. Crash” narrative that has emerged in different ways over the last few decades. Different catalysts quickly shifted the cultural narrative from enthusiasm to skepticism and from panic to crash in a repeating pattern.

In our view, in the late 1990s a “Boom narrative” emerged that the Internet was going to revolutionize everything.⁹ People started to believe that technology companies were going to make so much money from the internet that their valuations didn’t matter. This excessive speculation caused the “dot-com boom”¹⁰, which saw the NASDAQ Composite index rise by 400% from 1995 to its peak in March 2000¹¹. The narrative reversed in 2000. Investors had bid up values of technology companies to very high levels, and after the crash investors felt that most of the technology was unproven and most technology companies were worthless. The result was the tech crash. From its peak in March 2000, the NASDAQ fell 78% by October 2002.¹²

We believe that the Boom Narrative re-emerged in the mid 2000s, but in a completely different industry – housing. Historically, the value of real estate as an asset focused on the value of the underlying land rather than on the value of the home itself.¹³ However, the advent of home price indexes, the promotion of home ownership, and the rise of the “house flipping” phenomena in the mid 2000s created a cultural narrative that residential real estate prices could only rise, and that residential homes were a great investment opportunity for professionals and amateurs alike.¹⁴ When the economy and stock market were roiled by the 2008 financial crisis, the Boom Narrative switched to a Crash narrative. The perspective switched from optimism to believing that the financial system was collapsing, our way of life was being threatened, and that we would never return to normal.

We believe there is now an economic narrative of negativity around COVID-19. As investors started to realize the ramifications of the pandemic in March, the response in the stock market was a wholesale sell-off. Stocks were the first assets to be sold, but even asset classes that would normally be considered a hedge against market downturns were sold as well – like bonds and gold.¹⁵ The power of the economic narrative of fear trumped the value of the underlying assets.

As investors, it’s important to remind ourselves of these narratives as we make our investment decisions. Though we are surrounded by uncertainty and bad news, the truth is that historically, the cumulative average returns for the S&P 500 following bear markets have been 52%, 89%, and 132% respectively over the following one, three, and five-year periods.¹⁶ So, even though we may be tempted to sit on cash until things “look better” in the market, what we often mean is that we are going to wait until things feel better. And by the time things feel better, an extended period of time may have passed – and often the stock market has moved up and we lost the advantage of buying at lower prices.

The Epidemic of Isolation and Loneliness

We believe that the last unseen, but acutely felt epidemic is the epidemic of isolation and loneliness (“Wait, weren’t we talking about the markets?” you ask. Yes, there is a connection). Social distancing measures are creating an unintended psychological toll with increased anxiety, heightened stress, irritability, insomnia and depression.¹⁷ At our firm, we don’t just care about the health of our clients’ portfolios – we also care about their mental health. We know that during times like these when our way of life has been disrupted, when we are feeling isolated, and when we’re not seeing friends and family we can start to feel down. We may wonder if this may be the new normal for the foreseeable future. And, unless you have a heart of stone, we believe it’s enough to make you feel things, say things, and do things that are out of character for you.

Now compound that by the stress of watching the stock market gyrations and seeing the effect on your portfolio. If we weren’t in the middle of a pandemic, if we were around friends and family, we may have a more balanced approach to it. But in isolation – not being able to kvetch around the water cooler and collectively share problems and pain? That may exacerbate how we feel about our investment returns, how we feel about our ability to retire, how we feel about taking risks.

How does this impact us as investors? First, if you don’t feel like yourself, remember that you’re not alone. Avoid making investment decisions quickly or in reaction to what you’re hearing on the news. And finally, be careful about the amount of time you spend watching the news or how often you check on your portfolio. Better to spend that time calling a loved one or checking in on a neighbor. Academic research that shows the more often you check your portfolio, the more it effects your mental health – usually, in a negative way.¹⁸

Three Key Takeaways for Investors:

• Be ready for more volatility as additional data comes out and the world deals with the virus in stages
• Be careful of the negative narrative and waiting for things to look better
• Pay attention to your own mental health and avoid too much news or watching the markets