In our last blog post which we published last week, we wrote about the Efficient Market Hypothesis [EMH] and whether it was true, half-true or half-false. We fielded different responses to this post, half of which stated "of course, markets are inefficient" and the other half stating "they are efficient most of the time". We pointed out that these theories do not take "human nature" fully into account. History charts a series of irrefutable market bubbles and busts across multiple asset classes. When you are actually in a bubble or bust period, it can feel like conditions will go on indefinitely. The law of market cycles sais otherwise.
Over the last two months, the markets have charted a strong recovery track defying the hard hitting economic realities of the impact of the coronavirus. They have been - or so it appears - in denial of what all medical specialists and virologists are saying, which is that the coronavirus will inevitably re-surface in the fall of 2020, if it even disappears or lessens in-between. There are no maybe's, it's a 100% guarranteed. There is a reason why Operation Warp Speed [OWS], the government funded program to fast track the development of a vaccine, as well as its manufacturing and distribution, was established. Without a vaccine, a large sector of the general population are not going to get back to life, work and patterns of consumption as they were pre-coronavirus. The virus is highly transmittable and without vigilant precautions and collective discipline, we are only going to make it easier for it to find a path to its next host.
It is not a secret that the virus has not been contained and cannot be effectively contained without such collective effort. It is not a matter of dispute among medical experts. Until today, the markets have seemingly been ignoring this fact which has been continuously stated by medical experts. Even Jerome Powell, the chairman of the federal reserve, when interviewed a few weeks ago about the impact of the virus and what the Fed was doing, talked about various scenarios which would of course be worse he said "if the virus were to return in the Fall". But there are no "If's" from the perspective of every virologist on the planet. Did this fact go un-noticed by Mr Powell? We think this is unlikely.
If all these "knowns" have been known for some time, why did the Dow fall by over 1800 points today? The Federal Reserve has not changed it's stance with respect to its commitment to unlimited fiscal intervention and the government is more than likely going to pass a new stimulus package in July. So what changed? The Federal Reserve communicated a more realistic growth outlook and recovery timeline for the economy which co-incided with the unsurprising news that the virus is continuing to spread in the USA. Both of these realities were already "close to guarranteed knowns", so we must summise that the markets needed to be hit over the head with a two-by-four, before it could begin to accept it. It's time for the re-callibration of expectations.
Science is going to dictate the path to recovery and getting life back to a new normal. That is the reason the OWS was formed. Until such point one or more vaccines are developed and pass the rigors of the clinical trial process, there is not going to be any freedom from the contraints that the coronavirus brings with it. The typical scientific development process for a vaccine can be 4-8 years. A "Warp Speed" scientifc discovery process within 9-12 months for a vaccine, which is exciting, would be a first in history. There are a huge number of variables that ALL have to go right in the discovery process as well as the manufacturing and distribution of a proven vaccine to every human being to accomplish such a feat by October-December 2020.
While we are very confident that the overall objectives of OWS as well as other global efforts to discover a proven vaccine will be successful and will occurr much faster than any other vaccine in history, the odds of this occurring - in addition to the manufacturing and distribution - between now and 2020 are on the low side. We believe that this is far more likely to occur sometime in 2021. If 90% of all the items we just discussed go right, then perhaps by early March or April 2021, a vaccine will have been discovered and be in the very early stages of being administered. We think mass vaccination of entire populations is more likely towards the middle to end of 2021. It will be an incredible accomplishment, if this all plays out by the end of 2021. The timeframe for all of this to play out is the unknown.
When solid scientifc data emerges for one or more vaccine candidates, market "optimism" will inevitably soar. The latter alongside further government stimulus and Federal Reserve support, means that the markets will have an unprecedented rock-solid baseline of support. However, the impact of the virus which will still be in circulation (until OWS and its other equivalents around the world are successfully administered) will still be felt.
As economic data and scientific data come out, the markets will likely start to digest a more realistic pattern for recovery. The highly optimistic view is the least likely outcome.The most pessimisitic outcome is also the least likely outcome. The truth will undoubtedly be somewhere in-between. Until OWS is successfully concluded, human beings will remain more cautious and economies will be hampered in their recovery effort depending on how the virus circulates from region to region. In the USA alone, 40 million plus people need to find employment. That is going to take time. Travel, Entertainment and Retail will take time to fully recover. The less vigilant the response to the coronavirus, the more havoc it will wield, region by region which in turn will slow the recovery process.
While new market all-time highs are always possible even if irrational before the above plays out, it seems unlikely. We did however come within approximately 200 points of a new all-time high on the S&P 500 with little more than a high degree of optimism for a recovery to support it. The better than forecasted employment numbers turned out to be incorrect, but this news was not widely broadcasted.
As we mentioned in last weeks blog post, human nature will always present investors with opportunities.