We are living through a significant moment in history: the first pandemic of the modern era. The COVID-19 virus has rocked the global economy, disrupted lives and livelihoods, and sadly, claimed hundreds of thousands, if not millions, of lives worldwide.
We know that for many of you—our clients and colleagues—the grief caused by the pandemic has been personal and devastating. Even as we write about the paths to recovery, we do not forget or minimize the tremendous human costs.
In this edition of VESTED, we consider significant events that changed us and think about the ways our lives, businesses, the economy, and our investments could be affected. Even if we are far from having answers, it is essential to frame the questions about our economic future in a post-pandemic world.
Events That Have Changed Us
There are other points in history when the world has radically changed, virtually overnight.
In 1957, faint beeps from a beach ball–sized satellite named Sputnik spurred not only fear, anxiety, and an escalation of the Cold War, but also a doubling of research and development spending that launched an era of American innovation, with long-term implications for our
Other examples, such as the assassinations of John F. Kennedy and Martin Luther King Jr., or the terrorist attacks of September 11, 2001, were shocking, terrifying, and tragic. As shown in Figure One, as air travel fell by 25 percent following the 9/11 attacks, many felt that they may never fly again. However, just 13 months later, the number of departures reached new highs. Things returned to normal, even if security lines became longer.
There are also highly relevant examples of pandemic scares that provide room for caution, and for optimism. In some examples, such as Zika (2016), West African Ebola (2014–2016), and the pandemic flu of 2009, although scientists raced to develop vaccines, they weren’t ready in time to slow the spread of disease.1
Nonetheless, these examples provide lessons learned and a glimpse of post-pandemic life.
Perhaps the most useful precedent comes from the 2003 SARS outbreak in Hong Kong. As we have interviewed dozens of portfolio management teams over the past two months on behalf of our clients, including some of the world’s top international investors, a common theme has been how this crisis defined the modern pandemic response playbook.
Thankfully, the SARS crisis was short-lived, with fewer than 9,000 reported cases worldwide. But during its peak, the parallels with the current COVID-19 crisis are striking—including the complete shutdown of schools, restaurants, and public places for weeks, and unemployment soaring to all-time highs. Today, eight bronze statues in a Hong Kong park stand in tribute to medical workers who died during the outbreak.
In the same way that a vaccine protects by exposure, Hong Kong’s painful experience with SARS seems to have contributed to its success in managing the current crisis. Despite its high population density and proximity to the initial epicenter of the COVID-19 virus, through mid-May, Hong Kong has reported just over 1,000 cases and four deaths, and without a complete economic shutdown. This level of success is attributable to the healthcare infrastructure, capacity, and public awareness garnered by its SARS experience. We hope and expect that the next time a pandemic arrives on our shores, the U.S. will likewise be better prepared and equipped.
Even as parts of the U.S. begin to reopen, significant questions remain on both the medical and economic fronts. Medical questions include whether the disease is seasonal, how infectious people without symptoms are, who has recovered, and which activities pose the greatest risk. The economic questions are tightly linked to the medical ones, and include the tally of bankruptcies and defaults, how quickly lost jobs return, how much additional fiscal relief and stimulus will be required, and, ultimately, what the timing and shape of the economic recovery are.
Will jobs, growth, and earnings rebound quickly, with a rapid snapback that resembles the letter V? Or will the recovery follow a more gradual U shape? There are other alphabetical possibilities as well, such as a sawtooth W pattern if we see a second round of infections and shutdowns before effective treatments or vaccines are available, or in the worst case, an L-shaped scenario with a prolonged period of stagnation.
How Will We Change?
Regardless of the shape of the recovery, we know there will be permanent changes from the COVID-19 pandemic. And while government policies can change overnight, behavior change is far less predictable, as shelter-in-place moves from a mandate to a choice. Reopening the economy will not mean a return to normal.
Investors must always make decisions in the face of uncertainty. For long-term investors, the best approach to navigating uncertainty is to stick to the asset allocation prescribed by a well-developed financial plan. The more confidence in your plan, the less confidence you need in volatile, short-term price behavior of the markets. But this does not imply that we can ignore the potential for significant changes in behavior and the economy or how those changes could affect our investment strategy.
The pandemic shock creates the potential for winners and losers and for innovation. Massive fiscal relief and stimulus packages may provide support to some companies and industries while others are left behind. And the disruptive nature of the crisis creates tailwinds for some companies and grave risks for others.
In the period from late March (the nadir of the stock market decline thus far) to early May, nearly 30 stocks within the S&P 500 index saw their stock prices not only fully recover, but advance to fresh all-time highs—a list dominated by health care and technology companies positioned to benefit from virus-related disruption. We have seen a similar number of stocks continue their slide into April and May despite the broader market rebound, particularly firms exposed to challenges in the retail, travel, and energy sectors.
Across all industries, the pandemic disruption presents a new way to innovate and differentiate. We will see changes in how goods are produced and how services are delivered, with market share gains for the firms best able to adapt.
Where We Live
Migration to cities represents a centuries-long demographic trend. It was only about a dozen years ago that, for the first time in human history, more people in the world lived in urban versus rural areas.2
Facing a pandemic, it seems natural to consider leaving densely populated areas—particularly if workers and employers have seen success in work-from-home arrangements. According to The New York Times, even before the pandemic, large cities had seen their growth rates cut in half, as wage growth has not kept up with rising rents. If crowded streets, bustling restaurants, and ballparks become viewed as risks rather than perks, we could see this trend accelerate, with major impacts to city budgets and real estate prices. At a minimum, we would expect a spike in home offices, new home plans, additions, and remodels.
How We Work
An enduring symbol of this crisis will be virtual online gatherings with coworkers, friends, and family from kitchens, bedroom offices, patios, and even closets. Congressional hearings and Supreme Court deliberations have been conducted via webcam. As shown in Figure Two, telecommuting combined with streaming movies and games caused a doubling in the amount of Internet bandwidth consumed by the median subscriber in the first quarter of 2020.
For many organizations, remote working may persist well after the crisis has passed. The trend will also likely extend beyond office workers and virtual happy hours to areas including telemedicine and education, as an estimated 1.2 billion children worldwide were forced out of the classroom by the pandemic.3
How We Shop
In 2000, the poster children for preposterous dot-com business models were online grocery delivery services (remember Webvan and Pets.com?). What seemed absurd 20 years ago has become commonplace, even essential services to maintain social distance. As consumers become more comfortable ordering a broader set of products online, some retailers will fold while others creatively adapt.
Nothing has shifted faster than how and where we eat. As restaurants nationwide closed their doors, Figure Three shows how consumers stocked the fridge for stay-at-home meals. Even as social distancing rules begin to relax, restaurants will continue to face challenges from half-full dining rooms and supply chain disruptions.
Travel, Entertainment, and Leisure
Until effective virus treatments and vaccines are widely available, every group gathering represents some measure of risk. And as with investing, consumers will weigh the risk and reward trade-offs of such activities and prioritize those (schools and worship, perhaps) where the rewards are high and the risks may be manageable. Other activities may not provide this trade-off—movies, concerts, athletic events, and, as we move toward fall, our beloved state fairs.
No industry has been affected more than travel and hospitality, and the questions facing these industries are significant. Even with the backstop of billions of federal aid, airlines and hotels face an uncertain future. Will travel volumes rebound quickly as they did after 9/11, or will consumer preferences change? Although it’s far too soon to tell, according to fastcompany.com, one cruise line has reported cruise bookings for August at 200 percent of 2019 levels—suggesting pent-up demand for travel after months trapped at home.
Globalization and Trade
With border closures, travel restrictions, and finger-pointing over virus response, the global flow of goods, services, capital, and people is likely to change. The post-World War II globalization trend has contributed to lower costs and higher profitability—but even before COVID-19, heightened trade tensions had caused many firms to reconsider their far-flung supply chains as potential points of business risk. As firms seek to relocate or reshore production, they may seek to reduce cost and productivity impacts via new technologies, such as automation and 3D printing.
Debt, Deficits, and Inflation
Perhaps the biggest open question is the long-term impact of record-shattering levels of fiscal and monetary aid. The CARES Act and follow-on measures have provided significant relief to businesses and consumers and set the stage for a swifter economic recovery. History will judge whether the magnitude of the response was appropriate, but when the crisis has passed, there are several potential risks to be mindful of. These include the risk of reversing course and tightening policy too soon, thereby starving a fragile recovery, the potential for expansionary policy to crowd out private investment, reduced capacity to counter the next crisis, and inflationary pressures if the policy response overshoots the mark.
Inevitable but Uncertain Change
Each of the categories above will bring investment implications. Equity investors today have extremely low earnings visibility, with investors focusing just as much on firms’ post-pandemic survivability as on their profitability. Bond investors are scrutinizing financial strength in search of fortress balance sheets and are coming to terms with an interest rate environment likely to remain much lower for far longer. And real estate investors face perhaps the toughest questions as we await the economic fallout of virus-driven changes in the way we interact with physical spaces of all types.
Just about four months ago, more than 60,000 fans packed the Hard Rock Stadium in Miami, Florida, for Super Bowl LIV. Today, it is hard to imagine when we will again feel the same thrill of a crowd rather than the fear of a crowd. The answer will depend completely upon medical progress, and the reopening process is likely to be slow and fitful. But there is room for optimism, even as significant questions remain.
Regardless of the shape of the recovery, we must adapt to the inevitable long-term impacts of this shock and recognize that investing for the next decade will likely differ significantly from the last. The CAPTRUST investment committee has been hard at work analyzing these risks and opportunities to help shape our ongoing advice to clients.
1 Cohen, Jon, “Scientists Are Moving at Record Speed to Create New Coronavirus Vaccines—but They May Come Too Late,” Science, 2020
2 Ritchie, Hannah; Roser, Max, “Urbanization,” ourworldindata.org, 2019
3 Li, Cathy; Lalani, Farah, “The COVID-19 Pandemic has Changed Education Forever. This Is How,” World Economic Forum, 2020