In early October, I took a few weeks off to enjoy the Pacific Ocean's spoils while also enjoying some quality time with the family. This time away was rather intentional, as vacations tend to be. The trip's timing, coinciding with a birthday, anniversary, and fall break from school, was also viewed by our family as a small window of time that we thought we might have to travel ahead of another wave of the virus and, thus, tighter restrictions.

Sadly, as of this message, our concerns about the coronavirus have been validated. The number of new daily cases in the US is now over 180,000 a day, while hospitalizations are over the levels set in April, at nearly 70,000. This news is a punch to the collective gut and is on a perilous trajectory. Deaths tend to be a lagging statistic, but those too are not looking good. One need not be an epidemiologist to understand the risks of the current virus trends, both from a public health standpoint and from an economic and investment perspective. The leading scientists have warned us since nearly the beginning of the pandemic that the winter months of 2020/early 2021 would be the most challenging if we didn't get the virus under control, and, well, here we are.

Fortunately, there are green shoots in the battle with COVID. On Monday, November 9th, Pfizer, in partnership with its German partner BioNTech SE, announced that its vaccine trial, carried out using two separate doses and many thousands of participants, has shown positive outcomes (vaccinations) in ~90% of trial participants after 28 days from the second dose. You can read their press release by clicking here. Update: As of November 16th, Moderna has also shown effective vaccine trials, with over 94.5% efficacy. Granted, should the vaccines receive approval (not a slam dunk), the availability for 2020 would be limited, with a greater supply available in 2021.

Early Vaccine vs. New Wave Scenarios

As part of a portfolio rebalance communication to our clients in August, I noted an early vaccine as the most promising scenario within our stress testing analysis for the financial markets. In the early vaccine scenario, the environment would be quite favorable for equity markets globally to experience solid returns in 2021, given the optimism of returning to a more normal life. In a vaccine scenario, industries most negatively impacted by the pandemic would see a better environment to “catch up”. News of these potential vaccines has provided initial signals within the markets that this rollover looks promising.

In that same communication, however, I warned that we were not yet out of the woods and that several bad scenarios could still play out. One of those bad scenarios was the potential for a second (or is it now a third?) wave of the virus. At the time of that report, our models suggested that if a new wave of COVID infections take hold along with the absence (or delay?) of a vaccine, the outcomes would be quite damaging for the economy and, thus, the financial markets. Given the recent news, both good and bad, we have a rather binary outcome on our hands. From an investment perspective, I believe the next four months will be critical in determining if, as investors, we'll be digging ourselves out of a performance hole as we did following the March market crash, or if markets can run out the clock, ignoring much of the near-term lousy news on case counts until a vaccine is available.

Fear vs. Action

In late February and early March of 2020, fear of the virus had taken root in society: fear of the unknown, fear over how one gets infected, fear over the lack of protective equipment and available treatments (or being hoodwinked over snake oil treatments by a few), fear over a lack of a vaccine, fear over the lack of toilet paper (what the?!), and fear that our leaders were out of touch.

What ultimately calmed the markets against overwhelming fear and sent them recovering was action. Governments and central banks took action, feeding the economy with copious amounts of fiscal and monetary stimulus to dull the pain. Schools took action. Cruise Lines, airlines, and grocery stores took action. We, as citizens, took action; well, most of us at least. Most of us started wearing masks and social distancing. Grocery stores and restaurants reopened with plexiglass to protect both the workers and customers. We were able to curtail the virus's growth during the summer while enjoying more time outside with a bit more separation. Some of us even went on vacations to areas that we felt were embracing sound policies, spending most of our time with saltwater flushing out our sinuses.

Then we collectively got complacent.

There are plenty of opinions about why cases are spiking now, but here's mine: our country, and many others, eased off the actions that helped to flatten the initial curve. It was akin to leaving the campsite before the fire was completely out. Challenges or simple apathy to social distancing and mask use, and perhaps a more relaxed overall view, was the spark that lit the fuel. Things also got political, which in an election year was unfortunate but not surprising. There seems to be a unified interest in putting the virus behind us, but there's a deep divide on how best to do it. If March's events tell us anything, it's that the markets will not welcome inaction.

The positive spin to the prior paragraph is simple. We learned how to slow down the virus in April and during the surge in July, and now we must re-engage in behaviors that helped flatten those first few waves. We learned that the financial markets opted to reward action, even if some of those actions were seen as punitive over shorter periods of time, like economic shutdowns. We should expect new restrictions set upon us, and if governments don’t impose them, my wager would be that some businesses will opt to self-restrict, or as we’re learning, may not have a choice when too many employees are unable to work.

Action will convince the markets that we're serious about making it until the spring when the vaccines will hopefully be available for all those who want them. If we can get the latest trends in case counts to roll over, we might actually make it without too significant of a market hole to dig out of, if one at all. An additional stimulus to help blunt the pain for a bit longer would also help, but that is far from a sure thing, especially with a divided government and still (as of this writing) a contested presidential election. Will there be much appetite for a bipartisan agreement between now and mid-January? I'm not smart enough to know.

Until the cavalry (vaccines) arrive, we are likely in for some very tough months ahead as it relates to the pandemic. Let’s hunker down, be smart, and keep an eye on the future.

Thanks for reading,

Brian Aberle, CFP®
President, Aberle Investment Management