As we look forward towards an economic recovery, economists like to use the alphabet to describe the shape of the recovery: will it be V-shaped, U, W, L? I think the best description of the recovery, and one that is gaining traction with an increasing number of economists, is that the recovery will look more like a Nike "Swoosh". This can be thought of as a sharp drop followed by a slow and gradual recovery. One addition I would make to the idea of the swoosh is that the recovery or right-hand side of the swoosh is likely to be jagged and uneven. The virus is endemic in our population and unlikely to just disappear. I think the base case scenario is that as communities open back up, virus transmission will increase. Whether this takes place this summer or there is a delay until the fall is anyone's guess, but we should expect more cases as human interaction increases. The likely increase in virus transmission will cause some retrenchment in activity and be a driving force behind the slow and uneven recovery.
The economy will likely be subdued and operate below full capacity until the development of a vaccine. Over 100 vaccines are in development globally and at least eight have started testing in humans, according to the
Wall Street Journal. Unfortunately most vaccines in development will fail and the timeline until one is approved is uncertain. The most aggressive timelines include emergency approval with limited distribution this fall followed by wider distribution in early 2021. Countless scenarios push this timeline back, and there are many questions regarding how effective the vaccine will be. In the meantime, the longer uncertainty hangs over business and individual decisions, the worse for the macroeconomic environment. Uncertain businesses will cut back on investment to preserve cash, but this has a negative effect on innovation. Many employees of uncertain businesses will be concerned about future employment and will increase savings, negatively impacting economic growth. Also, 88% of Americans that lost their jobs in April reported that their layoffs are temporary. Extended economic stagnation can cause temporary layoffs to become more permanent, potentially eroding workers' skills. Lastly, as the economy operates below capacity for longer periods of time, the risk of liquidity issues becoming solvency issues increases for both businesses and individuals. Decreasing the level of uncertainty in a timely manner is clearly crucial.
During this time of uncertainty strong businesses will likely come out stronger and gain market share as weaker competitors struggle or fail. We believe it is critical to own a portfolio of companies that will not only survive the current environment, but thrive on the other side of our current challenges. We also believe it is critical to remain balanced during the ups and downs that will likely be in our near future. On that note, we have used the recent rally in equity markets to increase cash across our investment portfolios which allows us to be more opportunistic during future bumps in the road.