Optimism Fatigue

Friday Reflection | October 30, 2020

Optimism Fatigue

As the months churn by with no clear end of the pandemic in sight, fatigue creeps in and poses a new threat to virus containment and market stability.

In March and April, optimism was scarce. Fear of the highly contagious and deadly virus spurred dramatic policy response and widespread behavior change. State and local governments shut down non-essential businesses and social activities to limit potential transmission. The stock market declined precipitously, with the S&P 500 falling more than 35% in the first quarter.

Amidst the distress, communities pulled together, with singing or clapping out of neighborhood windows, and mask sewing campaigns. Resiliency became a rallying cry in the early months, and consumer spending rebounded in both the second and third quarters. Through herculean efforts, business activity was adapted to comply with new protocols, personal routines shifted, and vaccine research accelerated. Investors bid up the prices of companies that support the remote economy, with the stocks of Zoom, Amazon, FedEx, and Etsy soaring to new heights and pulling large cap stock indexes to pre-pandemic levels by late August. Optimism was carrying the day.

More recently, the collective emotion has shifted toward exhaustion. Winter is coming and investors are digesting Q3 earnings without a new stimulus package or vaccine yet delivered. Volatility has replaced resiliency. Stock prices on the S&P 500 and Dow Jones have slipped back to July levels, with S&P declining by -5.6% just this week. “Pandemic fatigue” has become a common talking point as Europe reinstates curfews and lockdowns to battle their second wave, and the US heads into their third wave of increasing severity.

The wave analogy is problematic for many epidemiologists. The virus spread is more akin to a wildfire, says William Hanage, an associate professor of epidemiology at Harvard T.H. Chan School of Public Health.¹ There are hotspots that have the ability to spread quickly and break containment. This metaphor hits perhaps too close to home for those of us in California. Therefore it may be unsurprising that fire season fatigue elicits similar feelings, as does the current crescendo of election fatigue. There is an anxious wish that events were over already, feeling burnt out on endless commentary, while simultaneously trying to stay vigilant in various ways.

For investors, the recent surge in COVID cases reignites fears that economic restrictions will become more strict and widespread, driving stock prices lower. This week, France re-imposed a national lockdown until December 1, Germany again closed all bars and restaurants, and similar calls for national lockdown are being heard in Britain.² Waning optimism about the United States’ ability to pass a long-debated stimulus package is further compounding near-term pessimism. The market won’t get a stimulus bill before the presidential election as it had hoped, and post-election still carries concern of legal challenges and political division that further extend the timeline for bipartisan stimulus.

We often get the question of whether a particular moment in the markets is an opportunity to either buy or sell. What about this moment? Unfortunately, we cannot predict short term market movements. As for the election and stimulus efforts, only time will tell whether this week’s decrease in optimism and market prices reflects systemic concerns, or if it represents a reasonable buying opportunity or re-entry point for those who were wary of higher prices over recent months.

Modifying behavior for a short time may be challenging, but it can also be novel or exciting, even when requiring sacrifice. Novelty is hard to sustain, though, over longer periods. A one-month diet or savings plan can improve physical or financial health, but if you revert to prior habits after thirty days, then the benefits quickly erode. Therefore, it is alarming that the percentage of Americans avoiding small gatherings with family and friends has fallen from 71% on May 10 to 45% as of September 27 according to weekly Gallup polls.

Practices such as handwashing and mask wearing have thankfully gained traction, and remain two of the most effective and low-cost tools available to combat the pandemic. Over the same May-to-September period, Gallup polling showed that 91% of respondents said they had worn a mask in the past seven days, compared with 80% as of May 10.³

The race for a vaccine is another key narrative in investor and public optimism. One aspect of the race is to determine which pharmaceutical company will be first-to-market and capture the monetary benefits of production and distribution. Another aspect was the political angle of whether a vaccine would be available before the election, potentially offering a positive injection to an incumbent party that has otherwise struggled to manage the pandemic.

Perhaps the most critical timeline consideration in the “race for a vaccine” isn’t monetary or political; rather, will effective prevention and treatment options be developed before the broad public develops apathy concerning social distancing and other public health adaptations. Fatigue and apathy are drivers of the recent increase in new cases:  they lead to more infections and more restrictions, which worsens the feelings of fatigue, creating a frustrating spiral.

Investors tend to be optimistic by nature. The mere act of investing money in a stock or bond implies a belief that the company will maintain healthy cash flows and grow over time, or at least the aggregate of many companies will yield enough growth to justify some diversified risk. That optimism will be tested in upcoming weeks as we navigate the shoals of political rancor, and as investors realize that saying goodbye to 2020 and flipping the calendar to January may not bring a materially different virus landscape.

Over the long-term, we believe that optimism is warranted. History has steadily rewarded those who can stomach some degree of market volatility to participate in economic progress. Fatigue across the markets may provide opportunities as management of the virus continues into 2021 and beyond. Just as riding the waves at sea, keeping your eyes on the horizon will minimize motion sickness.

In managing the pandemic or investments, the magic ingredient is consistency. With pandemic fatigue, the key is to continue wearing a mask and social distancing, leaning into virtual gatherings, and avoiding the siren call of pretending life is normal. Be frustrated, but keep going. With investor fatigue, the key is to stay the course and remain invested, focus on the long-term trends, and avoid the siren call of market timing.

We know these efforts are not easy. We also know that they work.

¹ Third wave of coronavirus infections in the U.S.? More like ‘wildfire,’ epidemiologist says. Published October 26, 2020. By Akshay Syal Harvard T.H. Chan School of Public Health

² France and Germany Lock Down as Second Coronavirus Wave Grows. Published October 28, 2020. By Matina Stevis-Gridneff. NY Times

³ Pandemic Fatigue Is Real—And It’s Spreading. Published October 26, 2020. By Stacy Meichtry, Joanna Sugden and Andrew Barnett. Wall Street Journal