The Best Asset in a Fearful Time: An Even Keel

This terrible year’s twists and turns continued Wednesday, as COVID’s spread continued accelerating in Europe, leading the eurozone’s two largest economies—Germany and France—to install month-long restrictions on select businesses and activities. Politicians also announced new restrictions in a few American cities, most notably Chicago and Newark. Like those in recent weeks, these moves rekindle fears of a renewed lockdown on par with the spring, stoking the MSCI World’s -3.1% drop on the day.^[i] As hard as it is, we think this is a time when keeping an even keel and not reacting to every headline is critical. In our view, it would take very restrictive measures to wallop this young bull market, given an autumn resurgence was so widely expected. Nothing to date is on par with that. Developments are worth watching, no doubt, but beware extrapolating current headlines into a much more locked-down future.

The day began with Germany and France planning to unveil new measures in response to swift increases in cases and hospitalizations. Mid-morning Pacific time, German Chancellor Angela Merkel followed through, announcing she had reached agreement with Germany’s 16 states to shutter bars, restaurants, gyms and other leisure establishments from Monday through November’s end. Social gatherings are capped at 10 people from no more than 2 households. Hotels may admit only business travelers. Merkel, who faces no shortage of criticism for this move, noted that contact-tracing efforts have failed, and with no way to identify how transmission is occurring and isolate that, she argues more extreme steps were necessary.

Hours later, French President Emmanuel Macron—who previously downplayed the likelihood of nationwide measures—took more extreme action. In a televised address, Macron announced that, effective Monday, bars, restaurants and non-essential retailers will close. Domestic travel and public gatherings are banned, and he encouraged companies to use remote work rather than have folks come into the office. Macron said these measures will last through December 1, but that he will re-evaluate in two weeks with an eye toward easing restrictions if there is improvement.

On this side of the Atlantic, Newark^[ii] Mayor Ras Baraka responded to a spike in infection rates by reinstating restrictions aimed at curbing the outbreak. Every non-essential business is required to close at 8 PM, with outdoor dining permitted until 11 PM (though how well that will work in November in New Jersey is an open question). Salons and barbershops will operate by appointment only, with gyms remaining open but facing new, heightened sanitation requirements. In Illinois, Governor JB Pritzker announced he will require bars and restaurants in the Chicago suburbs to cease indoor service effective Wednesday, and he limited public gatherings to a maximum of 25 people or 25% of room capacity, whichever is lower. These same measures are slated to begin in Chicago on Friday.

In sum, all this news hitting at once likely has many thinking back to the dark days in mid-March, and expecting only more and more stringent lockdowns to follow. But it is worth noting the differences between these announcements and the spring’s. In Germany, schools remain open. So do most non-essential retail establishments that aren’t eateries—and hair salons. Merkel’s provisions mostly target places where people congregate, as opposed to being blanket lockdowns. France’s moves are more extreme, hitting many more non-essential businesses. But here, too, schools are unaffected and factories will remain open—a change from earlier this year. Curiously, in our view, France will still allow retirement homes to permit visitors. In the American cities, rules are obviously local and far less extreme than either those in the spring or those abroad now.

As we have written many times in this space, renewed lockdowns that equal or exceed the spring could present a material negative for stocks. But that outcome isn’t assured. A COVID autumn wave has understandably been investors’ chief concern since before the first wave ebbed, with pretty much every news outlet we follow publishing hypothetical infection charts showing an even worse second surge. Comparisons with 1918’s flu pandemic, which had two distinct waves, were everywhere. Now, these latest restrictions dot the front pages of news sites from Paris to Portland. We may not know what politicians will do from here, but we do know how markets work. They discount all widely discussed information, including mass fears and opinions, and tend to move ahead of widely expected events. It is this knowledge that makes us believe markets likely reflect a great deal of today’s fear already in stock prices. We think that likely limits shock power, unless such moves are extreme. If they continue to be less than the full lockdown resumption that is so widely feared, we think that would actually spell a modicum of relief for stocks. That doesn’t negate the potential for sharp wobbles like Wednesday’s as events occur, but it does argue against a more lasting, much deeper decline, in our view. 

As difficult as it is in this incredibly challenging year, we think keeping an above-the-fray perspective is key. It is tempting to extrapolate current measures to something much more restrictive—and damaging. Doing so is just plain human nature. But it is also a behavioral risk that confronts investors worldwide now, carrying the risk of grave error if that extrapolation proves to be incorrect—or if stocks don’t react to it the way everyone seems to anticipate. If your goals require equity-like returns on some or all of your portfolio, deviating from stocks is the single biggest risk you take—and one you can avoid by remaining coolheaded.

Again, we aren’t dismissing risk. But when confronted with so many unknowns and widespread fear, it is important to start with first principles. Today, that means remembering how markets work and where they look hardest: at publicly traded corporations’ likely earnings over the next 3 – 30 months. Unless you know something others don’t on that front—or have a strong opinion, based on rock-solid evidence, that mass expectations are too positive—then we suggest thinking long and hard about exiting stocks. Bull markets always follow bear markets, but being out of stocks during a bull market can be a severe setback for those needing stocks’ long-term returns to finance a comfortable retirement.