Friday, March 27, 2020

Climbing a Wall of Worry


It has often been said that stocks climb a wall of worry. Coronavirus is going to put this maxim to the ultimate test in the weeks, months, and years ahead as investors digest news cycles that seem to circulate in discrete 15-minute increments of despair, hope, jubilation, and despair again.

Coronavirus appears to be the most challenging wall of worry for bullish investors to climb in at least a generation. What to do? Like any good coach will tell you, having a playbook is essential. In terms of relevant coronavirus playbooks, I am a big fan of Laura Spinney's "Pale Rider" which describes the course of the Spanish Flu.

As previously mentioned on this very blog several weeks ago, COVID-19 closely resembles the spread of Spanish Flu from 100 years ago. Although not identical, both diseases share eerily similar traits. More importantly, in my humble opinion, is what we can glean from a societal impact and recovery timeline as useful takeaways.

Given the exponential growth rate of infections throughout the globe, and the denial still present in many countries (Mexico/Sweden) that the "Pale Rider" is coming, I think there is the distinct possibility it could be much worse. Ignorance may be bliss, but denial is not a good strategy. I also believe there are vast societal changes coming our way along the scale of 9/11. You know a crisis is real if it affects behavior. This one will.

Prior to 9/11 airport security was present, but for all intents it was simply a quick screening...i.e. gun/no gun. After the Twin Towers fell, the world as we knew it fundamentally changed in terms of security protocols. I suspect something similar will happen in regards to coronavirus. This brings us to the proverbial "wall of worry" that stocks need to climb in order to regain their highs. What will lead to an economic recovery?

I think a two-pronged solution is in order to beat the coronavirus. First, we need to flatten the curve nationwide immediately. Although roundly criticized, Bill Ackman's interview on CNBC last week (18 March 20) was spot on; much of what he said came to fruition rapidly, several of his ideas still need to be implemented. His thesis: The coronavirus cannot live (long) without a host. If you want to flatten the curve, shut down the USA for a month.

The second prong, which needs to be worked concurrently, is to laser-focus on restoring positive cash flow on a national level; from large companies to small business, cash flow is essential to survival. There are undoubtedly certain industries which are going to take longer than others to recover, especially customer-facing ones which have significant exposure to geographic movement and human sanitation. Via paradigm shifts in behavior and societal norms, however,  many industries can be up and running within weeks. Success in flattening the curve and an economic "jumpstart," however, both rely on a key factor: Trust.

One of the first questions many portfolio managers are asking is: "What will survive?" From there a lot of speculation ensues as to: "Who has the best balance sheet" or "Who stands to gain market share?" But ultimately all that matters is: "What brands do I trust?" That's the lynchpin to the entire economy. Trust. Trust is going to result in sales which will result in cash flow which underpins survival. Trust is essential.

The founder of Salesforce, Marc Benioff famously remarked last year that "trust" has become the coin of the realm, commenting that "Trust has to be the highest value in your company." I echo this philosophy, and also believe that is exactly what will help investors climb the wall of worry ahead. Logistics, supply chains, manufacturing, safety, sanitation, all of them and more, are completely dependent upon trust.