The Unpredictable Meets the Unimaginable
We have arrived at a new landmark, where the unpredictable and the unimaginable intersect.
In PWA’s April 20 Market Update, we reported that Gilead Sciences had led the stock market higher on Friday, April 17, after news was leaked about a potential Covid-19 treatment, remdesivir. Nearly a week later, Gilead reported that the antiviral drug study, which took place in China, did not indicate clinical improvement, driving the company’s share price down. The unpredictable: Gilead is a darling one week, a disappointment the next. (Note: The University of Chicago is conducting its own testing of this medicine, so hope remains.)
The unpredictable is prolific: The S&P 500 is down approximately 13% in calendar year 2020, despite U.S. job losses totaling 26 million in five weeks (~18% of the population), deaths reaching 55,000, and the number of Americans infected with Covid-19 hitting 850,000. It seems to us at PWA that we are witnessing a Wall Street-Main Street disconnect.
While the stock market was continuing to gyrate, something we have never seen before took place. For the first time in history, sellers of oil contracts for May, desperate to unload inventory, drove the price to a negative $4.47 per barrel on Monday, April 20, meaning companies were willing to pay people to take oil away and store it. By Wednesday, April 22, there was traction for oil prices moving higher, and by the close of the week the price of WTI (West Texas Intermediate) crude reached $17.19 per barrel. To PWA, it appears the oversupply and lack of demand for oil both here and abroad are a clear sign that the U.S. and world economies have entered recession.
The unimaginable is just as abundant, as Congress recently approved an additional $484 billion bill to replenish funding the Payroll Protection Program for small businesses, along with funds to assist hospitals and testing. (Remember, this bill did not include any funding for states, which appears to be the next clash brewing in Congress.) Total government stimulus is north of $6 trillion, including $2.2 trillion contained in the CARES Act and another $2.2 trillion coming from the Federal Reserve. We all remember hearing the old adage, “Money doesn’t grow on trees.” While coronavirus devastation requires such extraordinary measures, we need to remain cognizant: “There is no free lunch.”
Risk vs. Uncertainty
Merriam-Webster defines risk as “the possibility that something bad or unpleasant (such as an injury or loss) will happen.” As such, risk involves known possible outcomes and probabilities that we can estimate. Risk can be scary, but it can also be managed. (This is why a risk assessment, “the sleep factor,” is included in every client’s financial GPS.) Uncertainty, on the other hand, is defined as “something that is not known.” As such, uncertainty involves unknown possible outcomes and, as a result, unknown probabilities. Uncertainty is truly scary because it is not manageable: We cannot predict nor measure the impact of the unknowable.
Right now, Covid-19 is more an uncertainty than a risk. We do not know when the crisis will end. We cannot predict its full economic impact. We are, however, closely monitoring and gathering information that permits us to parse uncertainty into risk. We study the stats, the medicines, the testing, and the vaccines surrounding Covid-19. We are also analyzing its potential economic impact on a global, domestic, local—and personal—level. Charlie Munger, Warren Buffett’s partner and vice chairman of Berkshire Hathaway, sums up PWA’s position rather nicely in an April 24 interview with the Wall Street Journal:
“I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes. We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing ‘oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves’ [into buying stocks]”
PWA, however, is willing to commit to going farther out on the limb than Mr. Munger: Coming out of this pandemic, there will be investment opportunities. The criteria will become more stringent—more selective—but there will be companies whose value propositions are rock-solid. PWA is constantly studying and evaluating these opportunities on your behalf.
As PWA weathers this unprecedented storm, like you, we are humbled by the degree to which people in our communities are reliant on food banks. We stand in awe of the front-line healthcare and pharmaceutical workers. And we deeply appreciate the workers in the food industry, who produce the goods and stock the shelves with the products that make their way into our pantries.
Thank you for your continued confidence.
Joseph A. Scarpo
Founder & CEO