First, I hope everyone is safe, happy, and healthy.  Positively the data I see globally is much more constructive than a few weeks ago.  The growth rate of COVID-19 infections is slowing, and in some countries, the absolute volume of infection is also in decline. The post below examines markets, investor psychology, and some of the more interesting articles I've read on COVID-19 I've recently read.

 

Last week, I came across the chart below from Visual Capitalist. I think the chart does an excellent job of illustrating typical bear market price movements and the phycological impact these price moves have on investors.

 

The challenge for investors is to determine if we’re in the market phase labeled UNCERTAINTY or OVERCONFIDENCE in the chart above. The ideal asset allocation between these two phases is very different.  Investors would want to be positioned aggressively in the UNCERTAINTY phase and very defensively in the OVERCONFIDENCE phase.

 

Two weeks ago, I felt like there was a solid consensus that markets were going to retest the lows. Since markets are counterintuitive and have a knack for moving in the direction that causes the most pain for market participants, the recent rally was right on cue. But in the last week, some exceptional minds have weighed in on both sides of this call.

 

Richard Bernstein is a former colleague, money manager, and market strategist I have a lot of respect for. Rich had been reducing risk in hos portfolios since the middle of last year, and his view was quite clear in an interviewed published in Barron’s on April 3^rd:

 

Bear markets have three phases they go through: The first is that investors view it as temporary, the second is that it’s worse than anyone could’ve expected, and finally, that it will never end. The fact that investors are still searching for a bottom suggests that we are still in the first phase.

Rich’s view is in stark contrast with Howard Marks’ view.  Howard is the author of Mastering the Market Cycle: Getting the Odds on Your Side, which is one of the ten best investment books I’ve ever read. Howard wrote four letters to his investors at Oaktree Capital in March, and his last memo ended on an upbeat note:

“The bottom” is the day before the recovery begins. Thus it’s absolutely impossible to know when the bottom has been reached … ever. Oaktree explicitly rejects the motion of waiting for the bottom: we buy when we can access cheap value.

Even though there’s no way to say the bottom is at hand, the conditions that make bargains available certainly are materializing.

Given the price drops and selling we’ve seen so far, I believe this is a good time to invest, although of course it may prove not [to] have been the best time.

No one can argue that you should spend all your money today … but equally, no one can argue that you shouldn’t spend any.

The more you want to garner potential gains and don’t mind mark-to-market losses, the more you should invest here.  On the other hand, the more you care about protecting against interim markdowns and are able to live with missing opportunities for profit, the less you should invest.

You’ll notice that both renown investors are very focused on market psychology and how it impacts themselves and other market participants. In my post, The COVID-19 Bear Market Playbook, one of my suggestions was to take notes of what you are planning to do, when you plan on acting, and what you might have done differently. I thought this post by Vildea, A Letter to My Future Investing Self, was an honest articulation of what we’re currently experiencing as we navigate this market.

 

Finally, I’ll end with some of the more interesting articles I’ve read about COVID-19 in the last week:

• Chicago City Wire, Roseland Hospital phlebotomist: 30% of those tested have coronavirus antibodies – 30-50% of patients tested for the coronavirus have antibodies while only around 10-20% have the active virus.
• Scientific American, What Immunity to COVID-19 Really Means – an excellent summary of what we do, and don’t know about COVID immunity and how countries are thinking about restarting their economies.
• Margin Revolution, Safety Protocols for Getting Back to Work – a summary of some measures under consideration when people go back to work.
• Nature, How sewage could reveal true scale of coronavirus outbreak – an approach I hadn’t considered for trying to determine how much of the population has had COVID-19.
• The Guardian, In one Italian town, we showed mass testing could eradicate the coronavirus – an interesting case study where all the residents of the Italian city of Vo were tested for COVID-19 twice and able to stop the virus in about two weeks.
• Politico, Are We Already Missing the Next Epidemic? – how fear is and may continue to shape our choices.

 

Stay safe, and I welcome a discussion.

 

Delli (delli@cibc.com)

 

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