Coronavirus Reopening—Risks and Opportunities

Jim Lowell:
In this Adviser You Can Talk To Podcast, Chairman Dan Wiener and Chief Investment Officer Jim Lowell discuss the risks and opportunities of reopening our economy and the global economy.

Jim Lowell:
Hello, this is Jim Lowell and I’m chief investment officer at Adviser Investments. I’m here with another Adviser You Can Talk To Podcast. I’m joined by Dan Wiener, chairman of Adviser Investments, and today we’re going to talk about coronavirus reopening risks and opportunities.

Jim Lowell:
Before I begin, let me reiterate our sympathetic understanding of the real economic and human toll this virus has taken on a global scale. But while these remain scary times, there are glimmers of hope for better times to come. And meantime, through the best and worst of times, Adviser Investments has been here to serve you. We remain fully operational and committed to helping you manage current events wisely and well so that you can better secure your financial future.

Jim Lowell:
Dan, I just mentioned a glimmer of hope and I think reopening falls under that category. We’ve been discussing the eventuality of reopening in theory for several weeks, but now we’re beginning to see it in practice. How do you think this slow reopening of some businesses will affect the economy overall?

Dan Wiener:
Well, thanks for giving me an intro here, Jim. I think slow is the operative word, and I do think that for the next couple of weeks we’re going to have to keep a very close eye on how the number of cases of coronavirus either increase or decrease in the areas where this reopening is happening. A lot of mom-and-pop businesses have been closed for good. Others are pivoting in some ways. To restaurants have become distribution points for food, either cooked or raw, that people can pick up, contactless pickups and take home and cook.

Dan Wiener:
It’s really a big question about whether this reopening… Are people going to go to barbershops? I know a lot of people are talking about wanting to get their hair cut, but are they really going to be going in and is it going to pay for these businesses to reopen? We know that a lot of large businesses are not reopening at all. They are going to maintain a closed posture until they see what happens here.

Dan Wiener:
It’s a big question for this country because half of all people who have jobs in this country work for small businesses. Small businesses defined by the chamber of commerce and the Small Business Administration as those with under 500 employees. 99.9% of businesses in the U.S. are small businesses and they’re responsible for 60% to 65% of net new jobs each year. If these mom-and-pops and small businesses under 500 people stay closed for a long period of time, we’re going to see more slowing in the economy.

Dan Wiener:
We just got the report this morning on GDP having fallen at a 4.8% annualized rate in the first quarter. I don’t think those numbers mean a whole lot. It was the worst quarter since the fourth quarter of 2008 when the economy dropped at an 8.4% rate, but I think we’re going to see a much bigger drop in the second quarter. Also, I think people have to remember that the economy is about 20% larger today than it was back in 2008.

Dan Wiener:
I’m not sure that we know a whole lot about how the economy is operating right now and I think that reopening is going to be a very small piece of it at the moment. I don’t know, what are you looking at, Jim? What are you watching for in terms of a real sense of recovery here?

Jim Lowell:
Well, I think you hit on one of the key components and that’s the jobs condition. Right now, obviously, the condition is dire, so we’ll look for any kind of improvement. But we’re not necessarily hopeful that we’ll see that, as you said, in this quarter. It may actually take several quarters, especially for some industries that are specifically in the perfect storm. I’m thinking of travel, leisure, industries like that.

Jim Lowell:
The overall sense in terms of sustained recovery will be delivered, and we’ve talked about this often, by means of more reliable medical data, first and foremost, that helps substantiate the hope and beyond the hope that we really have turned a corner for the better. While there are hopeful signs that tentative, small-scale reopenings may begin in greater succession, they’ve already begun in sort of piecemeal fashion. And while the market is clearly traded on that hope, we’ve already had a very significant recovery off the bottom based, I think we’d argue, on hope not on fundamentals, because as you pointed out, the fundamentals are oblique at best.

Jim Lowell:
Our portfolios have participated in that rally to a meaningful degree, but we’ll remain data-driven, cautious, prudent in our approach. I do think that the Fed stimulus, global stimulus provide a safety net underneath the global economies. But we’ve often discussed the fact that they’re issuing more, not less stimulus for a reason. That reason suggests we have a way to go in ensuring that the net itself is wide and strong enough, let alone capable of supporting a sustained recovery.

Jim Lowell:
In the meantime, we’re certainly looking at earnings. They continue to stream in. But like the economic data that you mentioned as being murky and unreliable at the moment, the consensus view among earnings is that there really is a lack of any sort of clear view. But there’ve been some positive surprises, Costco, Johnson & Johnson, for example, really upbeat notes.

Jim Lowell:
I’d say we’re seeing key East and West Coast states and counties delay their stay-at-home mandates by a few weeks or more based on their lack of clarity as to whether the flattening of the curve has been achieved and will stay flat to hopefully descending. I probably should note the reopening’s a vague term, subject to a moment’s notice. A moment like a probable recurrence of the viruses, as you noted, inside states, counties, maybe even countries that reopened too much too soon; the shock of seeing reopened states reclose is something that I don’t think the market is priced into current levels.

Dan Wiener:
No, I think the market actually, I think those who haven’t sort of kept track of this on a day-to-day basis would be shocked to learn that the S&P 500 is only down about 11% for the year. It’s human psychology, this sort of take a look at where things are from the peak; and of course, we’re down 15%, 16% from that February peak in the market. But if you just look at the year-to-date, 11% decline for the S&P, this is your typical retrenchment, just something on average you see every year, entry year.

Jim Lowell:
I completely agree. For clients and advisers and others who are in disciplined, well-diversified in terms of assets, stocks, bonds, cash portfolios, they’re likely fairing significantly better than that. Likely not even in correction territory, which would be down 10% for the year.

Jim Lowell:
We’ve certainly seen some sectors actually return to positive returns. I’m thinking of the health care sector and the technology sector as well. I mean I would say that all gains from the lows remain vulnerable to a second wave of the virus. The recurrence, of course, of the virus in the winter flu season is basically locked in. Societal disruptions, economic hardships, they’re going to be ongoing, unlikely to abate in the months to come.

Jim Lowell:
But we’re fully cognizant that we don’t need to wait for all states, all countries to, before we take any meaningful new investment step. But we definitely think that the most meaningful economies and the most meaningful states—that would be East Coast, West Coast—that really drive economic activity are the ones that we’ll be watching most closely.

Dan Wiener:
Yeah, starting to get some economic data in for the first quarter. Obviously, I talked about GDP numbers for April. I think it’s very important for folks, and given the recovery that we’ve seen so far in the stock market, I think it’s very important for folks to not read too much into data for the first quarter. We really remembered that the first quarter encompassed January and February when we were reading about some sort of virus over in China, but we didn’t know that it was already here. I think we have much more to come. We’ve seen claims for unemployment the last five weeks, 26.4 million people have filed for unemployment. I’ve seen the government jump in with lots of safety net programs to try to ease that pain. But I think that, like you said, we have to watch these reopenings very, very carefully.

Dan Wiener:
The first bit of data we’re getting really just sort of sets a baseline I think. Where are we from the initial shock and then how do we go along from here? What do we know? What are we going to need to know? How are hospitals going to be prepared for, as you said, maybe a resurgence or reoccurance of the virus either in the fall or more closer to the date of these reopenings if we do see blooms occur again.

Dan Wiener:
I think we got a very late start. But I’m hopeful that as we’ve ramped up production of face masks, of respirators… I see that a number of biotech companies and pharmaceutical companies have recently said they have really rushed their testing of new antiviral medicines along and maybe we will get the first glimmers of hope for some kind of a vaccine before the end of the year. But I think we have to remain cautious here.

Jim Lowell:
I would completely agree. Caution’s the byword. Prudence, patience the approach. I think you’re also right, Dan, that we’re beginning to get a better sense of where we’ve come from over the next quarter or two. We’ll get a better sense of where we are in terms of economic earnings data, and that will help better frame where we think we’re going. Ultimately, we take [crosstalk 00:12:05]. Go ahead.

Dan Wiener:
No, I was going to say that the media is sort of overwhelmed of course with all the losers and people losing their jobs, companies losing business, uncertainty about earnings. But let me throw this at you. They’re going to be any winners here in this pandemic? I mean, I say that with caution in my voice. I mean nobody wins, but we are investment guys. We’re not social scientists, we’re not doctors. We are looking at this from an investor’s point of view. Will there be winners in this, to come out of this pandemic?

Jim Lowell:
Oh, there absolutely will be. Even inside of the perfect storm industry of say airlines, there’s going to be one or two airlines that are able to gain market share over and against weaker competitors. That story will play itself out across every industry’s board. It’s going to be a market for investors in which active management, active acumen, good information, better analysis, better execution, the kinds of things that the managers we invest in right alongside of our clients are known for, are going to be able to deliver into the marketplace. We’ll be able to benefit from that kind of intelligence.

Jim Lowell:
I think maybe I’ll take health care and maybe you can take technology as two areas that is, as I noted, they’re already beginning to show a relative strength and even absolute strength in terms of a return basis. The health care stocks obviously have a lot going for them besides the long-term demographic trends that we talk about often because we have been overweight in the health care sector not just for weeks, months or years, but decades at Adviser Investments.

Jim Lowell:
The necessary demand of aging populations, but you’ve also got the short-term boost here because of the crisis, the demands that are created by this pandemic; and those aren’t just necessarily inside of the health care industry. We saw 3M, a manufacturer of masks and gloves, having some spectacular demand for dramatically dire conditions for its product lineup. We’re going to see that play out across the board, and then of course healthcare stocks overall have a great long-term growth trajectory as well. As the global economy returns, so will the demand for more and better healthcare services, not just here in the US but globally.

Jim Lowell:
One of the surprises though I would say, Dan, to us is longstanding, long-term investors who’ve gone through many bear markets, many recessions, is that in past recessions, typically the highest flying sector was the one that got beaten up the most, and yet this time around technology was clearly the high-flying sector and it still has wind underneath its wings.

Dan Wiener:
Yeah, there’s a whole host of companies that are doing well during this pandemic. Obviously, there’s been a shift to greater and greater use of cloud computing, all sorts of new technologies. I mean the technologies that you and I and the 95 people in our company are using to stay in touch, to keep our business running on a day-to-day business, to be in touch with each other with our clients. I mean we all use video phones and Zoom technology so that we not only can talk to one another but see one another.

Dan Wiener:
There’s a lot of questions down the road as to who will benefit from this. One person that I was talking to said, “It could be that electric cars see a big boom down the road.” Why? Well, partly… I mean right now with oil at $12 a barrel, it’s pretty cheap to fill your tank up, but you do have to go to a gas station, you do have to deal with a pump. You don’t know who picked up that handle the time before you, whether they were sick or not. I think people are going to be a little more cautious about going literally to gas stations to pump gas and they might just say, “You know what, I’ll buy an electric car. I can plug it in at home and I don’t have to deal with any of these gas stations and not knowing who’s been there before me.”

Dan Wiener:
On the technology side, a lot of companies are going to pivot to doing more work from home. There are people who are going to get equipped so that they can work from home and not have to go into the office every day. There are a lot of structural changes that I think we’ll see in the economy going forward.

Dan Wiener:
A friend of mine has a company called Lettuce Grow. “Lettuce” is spelled the way the vegetable is and Lettuce Grow is selling natural hydroponic, grow-your-own vegetable devices that you put on your deck or you put on your backyard, any place that there’s some sun or you can use grow lights. I think they’re around $500 bucks, and these things water themselves. You only have to maintain them I think for a minute or two a day, and what they’re producing is just incredible. Fresh vegetables right in your home. This is going to be something else that I think people are going to shift to. They’re realizing that the supply chains can sometimes be broken. If the supply chain’s broken, why not?

Jim Lowell:
I love the optimism, Dan. As we wrap up this Adviser You Can Talk To Podcast, clearly, there are a lot of unknowns in terms of both the risks and opportunities that reopening presents. But it does provide that glimmer of hope that we will be able to, over a period of several months perhaps a year or more, return to some semblance of normal. But in the meantime, there are clearly some risks that we will hope to be able to manage well and also some investment opportunities that are being created by this crisis.

Jim Lowell:
Dan, with that note, let me shift a tone and gear. You’ve been a music lover all your life. Always send me great suggestions to listen to from hard rock to jazz to blues. In these discordant times, can you give us some upbeat playlist favorites?

Dan Wiener:
Oh gosh, that’s fun. That’s great. That’s a great way to end this podcast. Sure. Let’s see. I am a big fan of a blues singer and guitarist named Keb’ Mo’. His actual name is Kevin Moore, but he goes by Keb’ Mo’. His songs are fun. The musicality is fantastic. I really would recommend that.

Dan Wiener:
Anyone who has known me for any length of time knows that I’ve been a big fan of Pat Metheny’s for years and years and years. I remember watching him in concert back in the ‘80s, the ‘70s in Boston. Pat Matheny’s an incredible guitar player, so anything that he has done is worth listening to.

Dan Wiener:
I just was sent a link to the video of the 1985 singing of the “We Are the World” song that was done to support Africa. Michael Jackson put this thing together. But if you go onto YouTube and search for “We Are the World,” it’s pretty incredible to watch all these singers come together all in one room, all the best of the best. Bob Dylan and Bruce Springsteen and Ray Charles and Stevie Wonder, all singing together talking about hope and worldwide peace and health.

Dan Wiener:
Those are three I’d go for. You know what, I’m going to throw it back at you, Jim. I know that you are a fan of film and film history, so why don’t you give our folks a couple of ideas on things they could either watch or read during these times.

Jim Lowell:
Let’s see, Dan, to chase the coronavirus blues away, even though I know it’s no time for joking and what we’re living through is as rough as it gets. Let’s see, sometimes you can fight fire with fire, so “Soylent Green,” “The Andromeda Strain” would fit that approach; more lighthearted, “You Can’t Take It With You.” That’s a zany, divided house unites in the end through love.

A movie from I think 1938, “Singin’ in the Rain,” which is interestingly a meta-reflection on disruptive technology in the disruptive transition from silent movies to sound. Those are good thematic choices, I’d say. But on an uplifting note, if I reach into my movie magic hat and pull out one must-see, it’s the light heartening, madcap switcheroo classic called, “What’s Up, Doc?” That movie still makes me laugh out loud no matter how many clouds there are in the sky.

Jim Lowell:
On those uplifting notes, this has been Jim Lowell and-

Dan Wiener:
Dan Wiener.

Jim Lowell:
From Adviser Investments thanking you for listening to The Adviser You Can Talk To Podcast.

Jim Lowell:
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