As we move through this pandemic, we will continue to communicate what we believe is valuable to consider at the time of the communication.

The above is a bit of a strange sentence; however, if you think about how rapidly things are evolving, it makes perfect sense. What we plan to send to you will sometimes be based on what we are seeing happen in the market, sometimes anecdotal, and at other times informational to the extent it helps shape our thinking/decisions.

The quoted paragraphs below are based on information from an institutional investment firm, GMO, whose outlook and research we have used in the past. What they have said is so succinct and in alignment with our view, that we wanted to share some highlights with you. Their communication was addressing, in broad terms, aspects of the Spanish flu epidemic and its relevance to today. Although much has changed in the last hundred years, (primarily in science, communication, and technology), there are enough parallels to warrant review:

“… we do not believe it will have (a lasting) impact on the fair value of global equity capital. The fair value of equity markets has been remarkably stable historically; the only events in our experience to truly impair it have been major wars, the Great Depression, and the 2008-2009 Global Financial Crisis (GFC). Most recessions, even deep ones, do not leave a lasting mark on the economy or the financial markets, nor have previous global pandemics.”

“Simply put, it takes an awful lot to change the underlying fair value of the market by more than a few percent. An acute event causing all companies to forgo dividends for a year would reduce fair value by the amount of the expected foregone dividends (2-4% or so at current valuations). Practically, an event has to either change the path of future return on capital for the world or cause a significant dilution event for shareholders.”

“The saving grace is that since this is a shock, there is little harm in governments stepping in with massive fiscal stimulus to ensure that people can afford food, shelter, and medical care, and that business bankruptcies can be held to a minimum. The moral hazard problem associated with saving companies in a downturn simply does not apply, and the calculus on deficit spending should also be suspended in almost all cases. Right now, the focus should be on getting to the other side of this event with as little permanent harm to the population and the economy as can be managed. If that requires trade-offs in future policy flexibility, so be it. Once we get through this period, long-term expected returns on capital seem unlikely to change in a meaningful way, and therefore it is hard to imagine why this should be a material long-term negative for future growth”

There is much that is still unknown; unlike during the Spanish flu epidemic, we are now a very connected world with a significant focus on the mitigation of the worst potential outcomes (minimizing fatalities). This focus may make this period of time in which we find ourselves dealing with COVID-19 longer, however, it will not change the end result; this too shall pass.

Thomas G Fee
Managing Director
vectorwealth.com/thomas-fee

Jason Ranallo
Director Portfolio Management
vectorwealth.com/jason-ranallo

Office phone: 612-378-7560
www.vectorwealth.com/client

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