COVID-19: Where It’s from and Where We’re Going

The entire financial market, including the stock market, is being impacted by a novel coronavirus called COVID-19. How did it happen and what does it mean for us traders and investors?

In 2015, a combination of FDA scientists as well as American and European scholars, in addition to the Wuhan Institute of Virology, Chinese Academy of Sciences, in Wuhan, China warned in the highly respected journal, Nature Medicine, about the emergence of a severe acute respiratory syndrome coronavirus (SARS-CoV). Their work suggested a potential risk of SARS-CoV re-emergence from viruses circulating at that time in bat populations and, most importantly, they concluded that the evaluation of available SARS-based immune-therapeutic modalities revealed poor efficacy. It was a significant danger sign. (https://www.nature.com/articles/nm.3985)

One year ago, in March 2019, virologists at the Wuhan Institute of Virology, where COVID-19 actually originated from!, warned about an outbreak that could cause a worldwide pandemic that had the potential to take thousands, if not millions, of human lives. (reference: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6466186)

And now, in late 2019 and early 2020, we have experienced just such a worldwide outbreak. The financial market is melting faster than ice does on the sidewalks of Los Angeles. COVID-19 has resulted in us having to face one of the biggest uncertainties of our lifetime. The market drops are even larger than when Nazi Germany attacked France. One might be apt to say that it seems the market had more confidence in a human enemy than it does in a virus. Virus seasonality is still not clear, but it is hoped that as temperatures increase with the coming of spring in the northern hemisphere, the spread of the virus will be slowed down.

But what does it all mean for traders and investors?
As of March 18th, $SPY is down 32% since February 19th’s high close. The worst-hit sectors include energy, financials, and industrials. Bitcoin and most cryptocurrencies are down over 40% and they seem almost irrelevant to invest in. China’s consumer spending on food and beverages was down by $60 billion for the months of January and February compared to 2019. We do not have that many tools to fight this recession. On the monetary policy front, interest rates are already at all-time lows. The Fed is running out of ammunition and should be very careful on how it deploys what it does have.

With the market off so much, there definitely are some very attractive buys right now. We don’t always get these windows to pick up quality names, but when they do open up, Warren Buffett’s philosophy of ‘being greedy when others are fearful’ comes to mind.

Where is the smart money investing?

All 11 sectors are red, with financials and energy getting hit the most. In addition, oil prices have stumbled over the last few months, due not only to the COVID-19 demand scare, but also because of the price war between Saudi Arabia and Russia.

The more resilient sectors have been real estate, healthcare, and utilities. During times like these, investors have historically invested in safe havens such as gold or real estate. Today, many are asking the question I posed above: where is the smart money investing?

If you are a buy and hold strategist, then companies with strong fundamentals can offer the greatest return once this turmoil is all said and done. The lack of liquidity will lead into a new wave of consolidation in the market which favors companies with strong balance sheets. These are the Chevrons ($CVX) and Johnson and Johnsons ($JNJ) of the world. In the past week, Mark Cuban (Dallas Mavericks owner and Shark Tank mogul) increased his position in Twitter ($TWTR) and Live Nation Entertainment ($LYV). In the technology sector, the cloud-based communications company, Zoom Video Communications ($ZM), as well as others providing similar services, are making all-time highs due to the “new and improved” demand for employees to work safely from home.

In times of economic downturn, or during times when the funds and Wall Street are uncertain, the big money will flow to safe havens. The utilities that provide basic amenities such as water, sewage services, electricity, dams, and natural gas are considered high-yield sectors because people need them, no matter whether it’s during a recession or when the economy is growing. Since utilities are part of the public service landscape, they are heavily regulated and almost always a stable business to invest in. Investors typically treat utilities as long-term holdings and use them to inject steady income into their portfolios, especially during times of market uncertainty. Imagine this, if I am unemployed, I may not buy anything on Instagram or Snapchat, but I will definitely pay my water, electricity and cell phone bills. The moral of this story is simple: keep an eye on where the big money is flowing.

With the market off so much, there definitely are some very attractive buys right now. We don’t always get these windows to pick up quality names, but when they do open up, Warren Buffett’s philosophy of ‘being greedy when others are fearful’ comes to mind.

I have analyzed the epidemics from the past two decades – including MERS, SARS and Ebola – and have observed that the market is meaningfully higher some 3 months following a peak global infection. China has been exhibiting a decreasing number of new cases on a daily basis for about two weeks now and they seem to have got COVID-19 under control; however, with the other parts of Asia, as well as Europe and North America now preparing for the worst, we believe we are likely 3 to 6 months away from that global peak level. With the bear market and the current corrections taking place, I myself, for my long-term investing account, have been pounding the buy button since Monday of this week.

To your success,
Andrew

PS: Stay safe and keep the social distancing!