Published on Mar. 26, 2020
This Too Shall Pass
We believe several markers are in place suggesting it may be an attractive time to invest in fixed income and equity markets, albeit in a conservative fashion. In our opinion, the financial markets have been dislocated. Prices have largely fallen considerably from where they were a month ago. Liquidity seized across fixed income markets and is only beginning to mildly thaw in the wake of massive Federal Reserve intervention. We believe that this suggests a buying opportunity, but of course these lower prices must be compared to the fundamentals of the companies.
The pandemic and the public health response have suddenly and severely curtailed demand for many goods and services. In the next few weeks, we believe that there will be massive additions to the unemployment rolls, and scenes of healthcare rationing may be streamed into our living rooms. The widening of corporate spreads and the bear market in stocks reflect these grim realities. But we believe the impact on corporate earnings will be temporary. A successful pharmaceutical intervention is possible from one of the many antiviral or antibody therapies currently being trialed. We are encouraged that social distancing will slow the spread of COVID-19, as it has in other nations. We believe that the monetary and fiscal stimulus packages are large enough to matter, though not a cure-all, and we expect to see more actions in the coming weeks. America’s collective ability to endure a “lockdown” economy has limits. We therefore expect that this too shall pass.
We believe it is important to invest where balance sheets can withstand a recession, which is why capital must be deployed conservatively. Fortunately, securities issued by many leading companies with solid finances were also marked down in this maelstrom. Our approach is not to attempt to be heroic, but instead to purchase the fixed income and equity securities of attractive issuers at discounted valuations. When the pandemic crisis abates, there will be catch-up purchasing of durable goods that were delayed in the downturn, while monetary and fiscal stimulus will not be curtailed as quickly as it was introduced. Though we do not expect a “V”-shaped recovery, we do expect a meaningful acceleration in activity off of the low prices. We believe that financial markets will anticipate this: Markets often peak while the economy is still in expansion, and they often trough while the economy is still in recession. In our view, putting some capital to work today properly anticipates this reality.