Why We Remain Defensive
At Longwave, we have no doubt that the world will emerge from the Covid-19 pandemic astronger and better society. Today, there are green shoots pointing to recovery – ‘the curve’ has been flattened and we are now starting to relax social lockdowns. However, we share the feelings of many of you that there are consequences to the coronavirus pandemic that have not yet been factored in or dealt with.
While as a society we are already thinking about recovery, the health crisis of this pandemic must still be tackled. Beyond that, we will have to deal with the economic consequence of the global effort to contain the virus.
From a health perspective, the good news is Covid-19 does not appear to be nearly as severe as the Spanish Flu. Treatments are in the pipeline and care for the most severe cases has improved. Historically however, pandemics tend to last 18 months to 2 years and we simply do not know if the virus will rebound as soon as quarantine ends or flu season begins. To truly feel safe we will need to find a vaccine or achieve ‘population level immunity’ but we simply don’t know when those will occur.
Then there is the record-breaking economic cost of the pandemic. According to the Chicago School of Business, through April alone, 30 million jobs had been shed and spending in the US had fallen by 30%. Some of those jobs could quickly return but it’s also likely many people will continue to self-quarantine even once government restrictions are lifted. Already, some company closures are becoming permanent. Leisure, travel and entertainment industries could be impacted for months and maybe longer. The loss of income and revenue will mean that consumers, companies and governments will not be able to return to their previous levels of spending right away.
While your portfolio is a key aspect of your financial life, we all know we can’t control the stock market. As we’ve often discussed, the most important aspect of your financial health is living within your means. This pandemic taught us how to quarantine ourselves, but for perhaps the next 6 to 12 months, we should also think about a quarantine for our money. Here are some suggestions:Recall that after the 2008 recession, it took 6 years just to get back the jobs that were lost. That recession lasted 18 months – we are only in month three of this event. While no one knows what might happen next, based on that comparison, Longwave believes that the short term holds more downside risk than upside potential. We are therefore positioned more defensively by increasing the cash allocation in client portfolios. Also, we continue to over-allocate to underpriced assets, known as ‘value’ stocks, which have been shown to outperform overpriced assets over time.
As we contemplate being a bit more budget conscious, our time under quarantine will show us the way. Today people are making changes to their spending that would have seemed impossible a few months ago. We’ve discovered the joy of meal prep with the family as an alternative to eating out 3 or 4 times a week. Walks in the park have replaced more elaborate weekend entertainment. Volunteering has replaced late hours at work. The concept of stillness has begun to be appreciated and practiced in our society in a way that could not have been accomplished without this seismic disruption.
At Longwave, although we are cautious about the next 18 months, we are long-term optimists. We believe in human ingenuity, the power of capitalism and entrepreneurism to find ever more efficient ways of organizing the economy. In the last century, this resilience has propelled the US economy like no other and we expect to continue on this historical arc, once we’ve recovered our health and financial well-being as a nation.
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