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Diversified Capital Management

Covid-19 Update II

Coronavirus, also known as Covid-19, has shaken global markets, instilled panic across the globe, and may  ultimately change the landscape of the world as we know it. 

What we know

Covid-19 is a type of coronavirus that originated in China and has rapidly spread throughout the globe.  There is currently no cure or vaccination for the disease.  The virus spreads like that of the flu or the common cold.  Covid-19 appears  to be a greater health risk to individuals with compromised health and individuals over the age of 60. Many governments and municipalities have issued travel advisories, implemented curfews and more are moving in the direction of mandated self-quarantine. 

Impact on Global equity markets

Global markets have reacted to the Covid-19 epidemic with increased volatility and close to a 30% decrease in broad equity market valuations.  While much of the decrease can be tied to the economic impact that Covid-19 will have on production, part of the decrease is due to the new age of algorithm and factor based, computer generated trades. 

There is no question that Covid-19 will affect economic output in the short-term.  The estimates in today’s news is that NYC will lose 3 billion dollars in tax revenue over the next 6 months due to a decrease in business production.  Businesses and economies across the globe will experience a loss of production as many factories and businesses are being asked/forced to close for 2 weeks or more. 

Amplifying the economic conditions is the new age of trading that developed after the financial crisis of 2008.  More so today than any time before, investment companies rely on computer generated algorithms to determine the price and buy/sell action of a stock.  The computer-generated trades are set to participate in short term market volatility whether the market movement is up or down.  This type of trading creates drastic swings in the market both up and down.  It explains why in recent years the equity markets can decrease 15% or more in a short amount of time only to rebound in less time. 

There is no question that the Covid-19 outbreak will have a short-term impact on the market.  Though, the affects of the downturn have and will be amplified due to the current trading strategies used on Wall Street.  The same trading strategy is one of the reasons why we are generally recommending to stay in the market.  When the market rebounds the move upward may will be drastic and happen quickly.

Impact on Global Bond Markets

The devaluation of the global stock market has led investors to flee to safety in bonds.  Additionally, central banks across the globe have implemented emergency measures to provide liquidity to large companies.  Both factors have caused yields on bonds to decrease to all time lows. The Federal Reserve has set their benchmark interest rate to 0%, the lowest in history. 

Bond prices have increased as investors seek higher yield in an already low interest rate environment.  Companies such as airlines, cruise ships and hotels face a possible bond rating decrease as they struggle to keep cash flow and capital reserves at a level high enough to sustain business through this difficult time.

The bond market will always be the haven for the equity market.  With low yields and low total returns investors will seek for greater returns once they feel the equity market has stabilized and the Covid-19 outbreak is under control.

A cultural Shift and market review

The impact of Covid-19 will last years if not permanently change how we operate as a society.  There appears to be two possible outcomes.  One, countries continue to isolate themselves and attempt to protect their people and boarders from another outbreak or threat.  Two, countries and the globe work together to prevent future outbreaks and threats.  In the end the truth will lie somewhere in the middle.

As more companies request or demand their employees work from home there will be potential for the next big cultural shift in the workforce.  Assuming productivity remains, positive businesses may prefer the work from home model.  Companies would have less overhead from not needing as much office space and employees typically prefer the life balance of working from home.  The downside being the loss of social engagement and comradery in the office.  Businesses would need to maintain some sort of office structure for meetings etc. but the overall footprint could be decreased drastically. 

In the situation above you would have an increased demand for IT, microprocessors, data storage, networking, and cyber security.  These industries could see an increase in demand and experience significant growth over several years if the cultural shift of working from home takes hold.  Time will tell if the economy can remain as productive with a work from home model and if countries will continue to embrace the shift after the panic of the Covid-19 outbreak has subsided. 

The second shift that is happening is medical or biometric screening.  Many hotels, airports and retailers are scanning individual’s temperature before letting them enter their business.  This cultural shift could become a norm, like the increase in security after the 9/11 attacks.  Now while boarding a plane it would be standard to go through the normal TSA process as we know it and have an additional temperature or biometric scan to ensure the health of customers and employees.  Effectively keeping in place some of the measures that have been implemented today in response to the outbreak.

This cultural shift will benefit the medical equipment industry and home goods such as hand sanitizers and disinfectant wipes.  Currently, all bars and restaurants globally have hand sanitizer readily available if not at each table and upon entrance to the restaurant.  These shifts could become a social norm providing significant growth in the medical equipment sectors and sanitation industries. 

The decreased demand in travel will be a temporary impact on the economy.  Many people value travel and experiences over almost anything.  With time global business and travel will resume and the travel industries will normalize.  In the meantime, these industries will face the blunt of the economic downturn.  These sectors are worth following and may provide some recovery gains though the recovery may take some time.

After the initial panic of the outbreak it is important to reassess global markets and the impact of Covid-19 outbreak.  The outbreak will change our social norms and shift global markets.  It is important to analyze and monitor these shifts in order to take advantage of macro shifts in the economy. 

We are closely monitoring the market, and are available to answer any questions you have.  Please call us if you have any specific needs or questions, or just want to have a conversation about your accounts.