Fear, Patience, and Persistence

Friday Reflection | July 17, 2020

Fear, Patience, and Persistence

In his inaugural address on March 4, 1933, Franklin D Roosevelt asserted that “the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” The dynamic oratory skills of FDR were meant to inspire a nation in the throes of the Great Depression and set the tone for radical policy change over his first hundred days in office.Today, the root cause of the crisis is different, but the fear is similar.

The citizenry that FDR was addressing was concerned with a fragile banking system, record levels of unemployment, and a depleted faith in the government’s ability to respond to the crisis. We, again, have record unemployment. This past week, jobless claims topped one million for the 17th consecutive week and 1.3 million people filed first-time claims. [1] This number is down slightly from last week, but was markedly higher than economists were expecting. We, again, have a lack of confidence in the government response to this crisis. Approval polls have sagged dramatically since March and guidance from top public health experts has often been at odds with proposed federal policy. This time, however, we are not facing panic-driven runs on the bank, but rather the risks of a highly contagious pandemic

Policy responses to coronavirus have varied widely across the globe, with the impact of “shutting down” large economies hotly debated throughout the pandemic. Certain states and countries decided the economic cost of imposing lockdown measures was too high, and instead opted to leave public health decisions in the hands of their citizens. Internationally, the UK tried this path initially with aspirations of herd immunity but quickly realized the flaws of that thinking. Sweden, however, has continued to embrace a laissez-faire approach and provided the world with an unfortunate case study.

The first few months saw Sweden’s economy remain resilient. Countries do not exist in a vacuum though, and now the worst of both worlds has arrived.  While we rightfully bemoan the death rate in the US versus many other developed countries, Sweden has suffered nearly 40 percent more deaths than the United States per million people. Compared with their closest neighbors, the numbers are even worse: they’ve seen 12 times more deaths than Norway, seven times more than Finland, and six times more than Denmark. [2] As European trading partners entered lockdown and international travel halted, Sweden couldn’t avoid the economic fallout either. Current estimates expect Sweden’s GDP to contract by -4.5% this year, whereas nearby Denmark – who did impose economic lockdowns – is predicted to contract at nearly the same rate. Analysts also forecast a slower recovery due to higher death rates and impacts on their labor force.

Sweden’s outcomes highlight that it is overly simplistic to portray government measures such as quarantines as the cause of economic damage. The real culprit is the virus itself. Investors expect Congress to recognize these warnings and pass another round of stimulus before critical $600 weekly unemployment benefits expire at the end of July. If politics get in the way of this crucial support and no agreement can be reached on a reasonable extension, economic metrics and market prices would both decline. There are multiple versions of stimulus currently being discussed, but as Franklin Roosevelt said in that same 1933 inaugural address, “There are many ways in which [unemployment] can be helped, but it can never be helped merely by talking about it. We must act and act quickly.”

The market has been mixed this week as it reacts to short-term data that seems dramatically positive and also tragically negative at the same time. Ultimately, more data is needed, and market progress will depend on both economic progress and our ability to address the current surge in cases.  In the midst of the busiest part of corporate earnings season at the end of July, all eyes will be on Congress as they debate how to continue to support both individuals, businesses, state and local governments, and ultimately, investors.

Fear of this virus has kept consumers at home – both voluntarily and by government mandate – and while the economic fallout has been jarring, voluntary quarantine helps reduce further contagion while vaccine research aggressively. Funding is being poured into vaccine efforts at record levels[3] while efforts to understand the duration of immunity proceed in parallel. Several recent studies are indicating that immunity may not be long lasting, which recently led UCSF to shift its research focus from vaccine development to development of treatments.[4]

Voluntary decisions to stay at home, to reduce social and economic activity, will help slow the spread so both our healthcare workers and pharmaceutical researchers can do their jobs. They also reduce demand, though, distorting the principles of supply and demand to which many of us are accustomed.

In economics, a demand shock is something that reduces consumers’ ability or willingness to purchase goods and services at given prices. The collective impact of people staying home to cook, cutting their own hair, and cancelling travel plans is a huge drop in demand, and has been a problematic shock to the economy even with federal stimulus. Each of the individual decisions that make up that collective demand ‘shock’ is made by factoring in the higher “cost” of potential infection; most are not willing to pay that price.

A supply shock, on the other hand, is something that reduces the economy’s ability to produce goods and services at given prices, conventionally a lack of raw materials or manufacturing capacity. Public health authorities and employers preventing service workers from doing their jobs can be thought of as a supply shock. [5] The current pandemic has created a dual shock – when workers become unemployed they stop producing and simultaneously decrease their consumption of other goods, such as cars or appliances, which is a demand shock in those specific sectors. This can sap income even from employed workers, and further dampen both willingness and ability to consume.

Collaboration between public policy and voluntary behaviors will be required for us to get through the pandemic, as well as continued fiscal stimulus. The combination is required to reduce the impact of the dual shock to demand and supply. Congress is currently debating how to continue stimulus in a way that supports state and local efforts to safely titrate economic activity. Getting it right matters. Unemployment insurance and other direct payments provide households with the means to continue spending, and to support themselves as they choose to stay isolated. Initiatives including the SBA’s Paycheck Protection Program can help support supply by keeping employers solvent, even if workers are staying home, and bridging the gap until progress is made toward a sustainable economic and public health recovery.

History offers up numerous periods of crisis that threatened the normal functioning of our economy and daily lives – whether the Great Depression era, the oil shocks and inflation of the 70’s, the calamity of multiple wars, or tech bubble and burst of the late 90s and early 2000s. Yet, investors were rewarded for remaining in the market.  Families that weathered the storms and stayed invested have increased their financial flexibility and the resources that could be stewarded for the next generation.

Fear often creates the desire to de-risk and reduce exposure to the market. While the realities of personal needs for liquidity and security can make that a good decision in specific circumstances, it creates new problems. Making a radical change to investment allocation is a timing decision, and it also forces another timing decision on when to get invested again. The twin actions of reducing risk in a moment of fear, and then tolerating it again in a moment of relative calm, are both emotionally driven decisions that end up having a real – and often negative – impact on portfolio values.

There are instances when the need for security dominates, and we always respect that. Like the cost of leaving your house to work or shop, though, there is also a price to be paid in terms the impact on future financial flexibility. No matter what, the near term is inherently unknowable, and that includes the outcome of the pandemic, decisions about personal activities, and near-term securities prices. The long term is inherently unknowable as well, but history tells us that a likely outcome is growth:  the reward for bypassing fear in favor of patience, persistence, and participation.

[1] 1.3 Million Americans Filed New Jobless Claims. That’s Now 17 Weeks Above the Million Mark. By Brian Hershberg. July 16, 2020 Barron’s
[2] Sweden Has Become the World’s Cautionary Tale. By Peter S. Goodman. July 7, 2020. New York Times
[3] Too Fast, Too Furious: Is U.S. Vaccine Development Headed in the Wrong Direction? By Tinglong Dai and Christopher S. Tang. July 16, 2020 Barron’s
[4] Peter Fimrite, “With coronavirus antibodies fading fast, vaccine hopes fade, too,” SF Chronicle, July 17, 2020.
[5] Pedro Brinca, Joao B. Duarte, and Miguel Faria e Castro, “Is the COVID-19 Pandemic a Supply or a Demand Shock?,” Economic Synopses, No. 31, 2020. St Louis Fed Research