Considering the Potential Long-Term Impacts of This Economic Disruption

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Stocks are rallying strongly right now, so maybe it is a good time to look forward to the long-term impacts of this crash. There are still some technical and fundamental hurdles to overcome before I would really trust that we won’t challenge the lows again, but whether we do or not, past experience of big market moves tells us that there will be some long-lasting changes to the mindset and habits of investors, businesses and consumers once this is over. What might they be?

The problem with answering that, of course, is that this situation is unique. There have been plenty of health scares prior to this that came to nothing much economically (such as Ebola or SARS). There have also been plenty of crashes for other reasons, but nothing directly comparable to what we have seen over the last couple of months.

We just have no historical examples to fall back on, so the assumption of a “v” shaped recovery that the market is making right now may not be correct. Even if it is, there will be some industries and sectors that will feel long-term effects.

Over the last two weeks, the rally in the stock market has, in context, been almost as remarkable as the crash that preceded it. It has come even as the restrictions attempting to slow the spread of coronavirus have intensified and despite those efforts, the impact of the disease has worsened. More relevant to stock prices, we don’t yet have any real measure of the economic impact of shutting down to such an extent. The recent jobs report covered only the period to about halfway through March and weekly numbers are inaccurate at the best of times, and even more so when the numbers are huge.

Some of the potentially lasting disruptions are speculative. It could be, for example, that some companies question their expenditure on office space, given that employees have now proven that they can be just as productive working from home. That would negatively impact commercial real estate, but benefit companies like Slack (WORK) and Zoom Video (ZM) that serve the virtual conferencing and work channel spaces.

Some are more obvious, and even evident now in some cases.

I spoke yesterday to a friend whose company depends on supply from a major microchip manufacturer. He said that the current wait time on orders are estimated at fourteen weeks, when it used to be just days. They had orders but couldn’t fulfill them. They were worried that cancellations would come before long.

I also heard of a restaurateur with dozens of restaurants who was already thinking of the long-term impact on his business. He had money put aside and estimated he could survive six months or so on takeout business but was worried about what would come after that.

He pointed out that what was previously a one hundred cover restaurant almost certainly wouldn’t be that in the future. That might be the result of regulations, or it may just come from an unwillingness among customers to sit a couple of feet from another table. He is sure revenue will be negatively impacted to the extent that his business will be in jeopardy.

Then there is the psyche of investors and consumers to consider. Will this crash, like the last one, leave investors with a risk-aversion that will last some time? Or, if the recovery is as rapid as some believe it will be, will it have the opposite effect? Will risk remain in vogue?

Those questions will have an impact on the performance of speculative and growth stocks going forward. Will stocks like Virgin Galactic (SPCE) that got way ahead of itself before the collapse ever recover their appeal as a risky, but potentially massive business? Probably not for some time. When everything looks to be fully valued, as was the case earlier this year, risky trades have more appeal, but when traders and investors can buy solid, cash-rich, proven businesses at big discounts, why add to the risk profile of a portfolio?

The coronavirus pandemic will have effects, both good and bad, that last beyond the day when the virus itself is no longer a danger. Hopefully, the sense of community that isolation has ironically engendered will survive along with the outpouring of compassion and incredible acts of charity we have seen.

Economically, the impacts will be more varied. Restaurant and commercial real estate businesses could endure quite long-lasting problems, while food delivery and virtual connections will benefit. Supply chain disruptions will take some time to disappear and that could have a knock-on effect that slows the recovery more than expected, and risk will be dialed back for a while.

We cannot know for sure when this will be over or how bad it will get before it is, but it will be over at some point. Investors should keep in mind that when it is, some things will have changed.

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