Covid And The Big Bear

The world has changed over the couple of weeks in ways that are likely to leave lasting scars for years to come. In the United Kingdom, the atmosphere can only be described as surreal. The Coronavirus pandemic has almost completely consumed all the oxygen in the mainstream media and on social media. We are living in strange and uncertain times.

The financial markets over the past two weeks have also come to this realisation that COVID-19 story is one that is not going away anytime soon. When news of the virus first appeared in China and Wuhan went into lockdown, markets in the western world were complacent. However, a rapid escalation of cases across the world has caused global markets to react sharply in recent days.


While stock markets appeared to be in a near free fall at times, the dollar and bond markets rallied strongly as worried investors sought the perceived safety of United States government securities. The ten year treasury note has fallen to record lows of about 1%. This is a bad sign.


Since bond prices move in the opposite direction of yields, this means that investors in the ten year treasury saw the value of their bonds rise last week while stock investors suffered losses. Investors are willing to accept a 1% return over the next ten years. This is absolutely crazy!


As for the stock markets, only time will tell whether the falls are warranted or not. But in the long run, even the worst pandemics will run their course and conditions will improve. Personal and community preparedness is far more important at this stage than worrying about the prices of financial assets. Money is important but can be replaced whereas lives lost are lost forever. Trite, perhaps, but still very true.


In terms of business activity, a few thoughts on the subject might be helpful when thinking about the potential impact of the virus. It is useless to think in terms of the impact to stocks without considering the impact to the underlying businesses represented by stock prices. The following points might not be particularly insightful but still seem relevant enough to outline briefly:


Not all industries and sectors are equally exposed. It is obvious that a cruise ship operator, an airline, a hotelier or a cafe will suffer greater harm from Coronavirus compared to an operator of essential fast moving consumer goods or a grocery store providing essential products and services needed for daily life. For the most part, financial markets understand this type of “first level thinking” fairly well so we see stocks of cruise ship operators, for example, reacting very negatively to the prospect of travel disruptions. On the other hand, companies like Unilever and Procter & Gamble have held up well.


Some businesses will benefit. The obvious examples here include companies that are selling equipment or services needed to combat the virus itself. Also consumers health companies will stand to benefit. It is easy to see Reckitt Benckiser which makes, Dettol, Lempsip and Durex doing well.


Some business will be lost forever while other business will be deferred. A meal out at a restaurant or a coffee shop is a prime example of lost business. If you don’t have a coffee today, it doesn’t mean that you will have two the day the virus is over.


Debt will kill many businesses. If a company has excessive debt, how will it make interest payments considering no cash flow is coming into the business due to lockdowns and low consumer confidence. Have a look at a company’s balance sheet to assess its default risk. This is why shares in small companies have been the hardest hit as it is harder for small company’s to keep financing lines open.

Markets are emotional and fickle because human beings are emotional and fickle. The current economic environment feels like 2008/2009 all over gain. Only this time, things are happening much more quickly. In times like this, it generally pays to panic early or double down late. We are well past the “panic early” point. But either way, important to remember that the bear market will end.


It might feel like the end of the world at present with stock prices falling everyday. There is an old saying that experiencing a bull market is similar to riding up an escalator while living through a bear market is more like riding down in an elevator. At times, the elevator may appear to be in a free-fall.Eventually, of course, I think this market will bottom. There will be fiscal stimulus. There will be monetary stimulus. There will be pent up demand from months of quarantines. It pays to be optimistic over the long term. The United Kingdom survived the Great Depression and two World Wars. It will survive the Coronavirus. We must keep positive and stay motivated. For this too shall pass.