I started these “COVID-19 Diary” posts on April 1, shortly after the quarantines and lockdowns began. Much has happened since then, including five posts trying to explain events as they occurred. Now that those strictures are beginning to lift, it seems appropriate that this sixth post remind readers why things unfolded as they did.
At the time of my first entry, infection and death rates in this country were close to their peak. Of course, no one at the time could say with any certainty they would not rise higher –– speculation in the media and even within the scientific community in early April was all over the map. It wasn’t difficult to believe that the United States and the world were on the brink of something like the Black Death, which destroyed a third of Europe’s population in the middle of the fourteenth century. Leading up to my April 1 post, financial markets, if they were not anticipating the Black Death, certainly feared something pretty awful. From their highs on February 20 to their lows on March 23, stock prices, as measured by the popular S&P 500 Index, fell a steep 33.7 percent, giving up all the ground gained in the previous two years.
Even in early April, when U.S. deaths and hospital admissions reached their highs, there were hints that the pandemic here, even if it worsened, would not do so at its previous pace. These were only straws in the wind, but they were enough to convince some investors to reconsider, if only partially, their earlier decision to anticipate the worst –– not necessarily to become optimistic, but to reassess their earlier degree of pessimism. With that, stock prices began to lift off their lows. By mid-April they had regained almost half the ground they had lost in February and March. Yet it was about then that evidence emerged showing how economically devastating the lockdowns and quarantines were becoming. Initial claims for unemployment insurance, for instance, were running at over 3 million a week, more than ten times anything anyone had ever witnessed.
The juxtaposition of stock market gains with such difficult economic news sparked media speculation. Some stories claimed mystification by what they termed the “decoupling” of financial markets from economic reality. Some headlines, in a style reminiscent of conspiracy theories, suggested that, somehow, Wall Street was benefitting at the expense of the rest of the country.
In retrospect, none of the market’s actions seem strange at all, and for readers of these blog posts they should not have seemed strange even as they were happening. Markets, after all, had priced in bad news long before any bad news was available. By the time that anticipated bad news had arrived, many investors had begun to look beyond the economic pain of the emergency.
Now, early in June, the course of the disease and the steps to reopen the economy seem to have validated the market’s April reconsideration of its earlier pessimism. But the future still holds considerable uncertainty. Infections will doubtless rise with the economic re-opening. And if they rise to levels that require a reintroduction of quarantines and lockdowns, then markets will have lost the basis for their optimism, and they will retreat accordingly. Even if the level of infections remains manageable and there is no re-imposition of severe anti-virus strictures, the economic recovery might still disappoint. Though politicians paint a pretty picture, many restaurants, retail facilities, and other firms may never reopen, thus denying the economy those facilities and jobs for their former employees. Recovery then will demand more than just a resumption of former activities; it will demand rebuilding, a much slower and more arduous process. I do not doubt that the economy will eventually recover, but the speed of the recovery remains very much in question, and market prospects hinge on that consideration.
Stock and bond prices, then, remain vulnerable, both to bad news on new infections (especially if they require a relapse into quarantines and lockdowns), and to the pace of recovery. The inevitably uneven flow of information will, unavoidably, create moments of fear in the investment community and these will drag down stock prices. But because the economy will eventually recover, these moments should present long-term buying opportunities. But I remind readers of this blog that those opportunities belong only to those who can invest over a longer time horizon.