Making Sense of the Markets Amidst COVID-19
Recently, the Labor Department reported more than 20.5M US citizens are now unemployed. This ballooned the US unemployment rate to 14.7%! For context, that’s worse than the 2007 financial crisis (10%) but not quite as horrific as the Great Depression (24.9%).
And yet, despite a dizzying slide in the stock market in early March, the S&P 500 is up for the last twelve month (LTM) period. In other words, we lost nearly 10 years' worth of jobs created, but the stock market is seemingly unfazed. Wait, how?
First, the stock market is a sometimes misunderstood but highly valued representation of the economy’s well being. It is future-facing and directly influenced by anyone that invests in publicly traded companies. This can range from your next-door neighbor to an Ivy League-pedigreed hedge fund investor. Its fluctuations are driven by optimism, pessimism, and an amalgamation of semi-informed decisions. Today’s macro environment is a chilling reminder that the success of the stock market and that of the economy often don’t go hand in hand.
Yet, the continued bull run of the stock market indicates optimism. This raises a second question: what are people optimistic about? Two theories, (1) the stock market is currently the best option for investors, or (2) they’re encouraged by accelerated innovation in this “new normal.”
In words more eloquent than I can muster, Paul Krugman of the New York Times states that “investors are buying stocks in part because they have nowhere else to go. In fact, there’s a sense in which stocks are strong precisely because the economy as a whole is so weak.”
A primary alternative to investing in the stock market (often referred to as equities) is investing in bonds. These typically yield lower returns and imply a lack of liquidity in exchange for a guarantee by large public entities such as public authorities or credit institutions.
Krugman largely derives his thinking from the low rates of return accompanying these bonds. Some interest rates even run negative. These returns, from a historical perspective, are so shockingly low, that it may justify the stock market’s continued gains. Perhaps, investors are idealizing the stock market as the lesser of two evils.
To caveat, the general populous may instead be encouraged by newfound innovation in the world of COVID-19. Satya Nadella, CEO of Microsoft, says “[he’s] seen two years’ worth of digital transformation in two months.”
Every business today has been shocked into a more desperate, lean, and competitive mindset. Perhaps the daunting task to simply survive has triggered a Darwinian response among businesses, accelerating changes that would have been years in the making. In this scenario, businesses have generated new value for the world that justifies the confidence. As Benjamin Franklin put it, “necessity is the mother of invention.”
Take Canlis, a fine-dining restaurant based in Seattle, for example. They decided to temporarily shut down their fine-dining business. In its place, they unveiled three new business concepts including no-contact delivery, cocktail and bottle kits, and ingredient boxes. This has allowed them to keep the Seattle community fed and their entire staff employed, a remarkable feat.
Zoom is another great story. Eric Yuan, CEO of Zoom, made their product free for all K-12th grade students (and some colleges), a generous gesture that prioritized keeping people connected over an immediate profit. I am certain this tremendous decision will yield long-term benefits, as these students will one day champion Zoom’s product within their respective companies. In addition, the extra attention raised security concerns. This may seem problematic, but I believe this actually helped them identify and tackle a mission critical issue earlier rather than later.
To be clear, we certainly have tough days ahead, and there is a lot of work to be done before the economy fully recovers. Thankfully, unsung heroes have emerged in every corner to protect the safety and well being of others. Like Warren Buffett (pictured above), I am overwhelmingly optimistic that individuals, and businesses, will take the right steps to fast forward us into a bright future. Taking Buffett’s words one step further, “never bet against” humanity.
Thank you for taking the time to read through this! Also thank you to Nick Houghton, Emily Li, Pranav Sachi, and my parents for their help in this post and their tremendous support. If you enjoyed these ideas and would like to chat, feel free to add me on Twitter @dkwon98.
