VUCA. Introduced by the Army War College in the late 80s, the term stands for volatility, uncertainty, complexity, and ambiguity, and was coined to help describe various scenarios following the end of the Cold War. The idea is that if you are in an environment that has high volatility and high complexity, but low uncertainty and low ambiguity, you will follow one course of action, but if the inverse is true, you will follow another set of actions. In short, it is a framework that can guide behavior, and hopefully, improve outcomes.
This framework helps us unpack our current situation, and, how it is evolving.
When it entered our daily psyche (way back in February), the coronavirus (COVID-19) outbreak had high volatility, high uncertainty, unknown complexity, and high ambiguity. It, and its impact, was an enigma … and no one knew how to handle it … and markets reflected that sentiment. As the outbreak has progressed, volatility has decreased (but is still high), uncertainty has decreased (but remains, particularly in terms of economic impact), and complexity and ambiguity have both decreased.
In short, the outlook has improved, and markets have responded appropriately.
And yet, and this is a big yet, the economic impact is looming. While we don’t know how dramatic the impact will be, we are starting to see it likely will be massive. On the positive side:
- The growth rate of COVID-19 cases is falling (more on that shortly).
- Our health care system has stabilized.
- Death rates are falling.
- Citizens around the world are behaving (mostly) well.
- Governments are providing significant amounts of stimulus and liquidity to help see us through.
Yet here is what makes this difficult: No one knows what will happen next. We see data that is quite literally unprecedented. From jobs to consumption to borrowing, we have never before seen numbers change so quickly. How long will this last? When will we get back to work? When will our children go back to school? No one knows these answers yet and, as such, it is nearly impossible to forecast what the economic impact will be.
To follow, we first provide an update on how the COVID-19 data is changing, and second, some historic perspective.
As such, let’s begin with a quick update on the nature of the crisis. As of the morning of April 21:
- The novel coronavirus (COVID-19) has infected a bit more than 2.5 million people and killed more than 174,000 people.1
- In the United States, there are now nearly 800,000 confirmed cases along with a little more than 42,000 deaths, with 14,000 deaths occurring in New York alone.2
- Italy, Spain, and France all have more than 20,000 deaths, and the U.K. has 17,000 deaths.2
Clearly, these are frightening and tragic numbers, and help explain why the sell-off has been so emotional and fear-driven in equity markets worldwide.
With that said, the speed at which the global lockdown has had impact is equally remarkable. Just one month ago, the global growth rate of COVID-19 cases was 19 percent per day. Today, the global growth rate is less than 3 percent per day. Just one month ago, the number of confirmed cases doubled every four days. Today, the number of cases doubles every 24 days. Chart 1 helps demonstrate this dynamic.
Domestically, the U.S. slowdown in case growth rates has been similarly remarkable. One month ago (March 21st), the U.S. growth rate was 40 percent. As of April 21st, it is 4 percent. One month ago, the number of cases doubled every 1.8 days; today, the case-doubling rate is 17 days.
Chart 2 helps demonstrate just how dramatic that change has been and helps explains why our health care systems are now able to better manage the outbreak.
In short, the lockdown is doing just what was intended: it is dramatically slowing the growth rate of cases and deaths, both domestically and globally.
Unfortunately, that lockdown also has significant consequences and, notably, no one understands just how large those consequences will be.
As evidence, let’s review the variance of gross domestic product (GDP) estimates among the world’s most notable economists. Bloomberg believes GDP will fall 9 percent in the second quarter, Wells Fargo estimates 23 percent, Goldman Sachs predicts 34 percent and, rounding out the full picture, Evercore ISI forecasts a whopping 50 percent.5
Considering that we are less than one month into the second quarter, and that we have no idea when the economy will come back online, it seems reasonable to grant our favored economists some leeway in their predictions.
Regardless, let’s turn to what we do know. The U.S. economy is experiencing unprecedented change. Unemployment is rising, consumers aren’t spending, and businesses have been altered in ways that are not yet understandable. And all of this is changing daily.
Just yesterday, for example, we learned there is some speculation that antibody testing in California suggests fatality rates may be vastly over-estimated, Sweden may reach herd immunity in the near term, and China added 12 new cases yesterday…that’s right, just 12.
This then begs the question: what are investors to do?
First, let’s breathe. We are seeing positive signs, and what we are doing is working. This is perhaps the most compassionate and humanistic effort ever conceived by mankind. We are quite literally putting our lives on hold to protect the most vulnerable among us. People everywhere are taking risks and demonstrating extraordinary efforts to help their fellow citizens. We should take solace in that effort.
Next, let’s summarize what we know:
- The sell-off since mid-February has been unprecedented and was largely uncertainty- and fear-driven. The downturn was fast, and the upturn was fast. Both the sell-off and the subsequent rally set records, and both were nearly impossible to time.
- The growth of the number of cases around the world is slowing. The desire to get the economy back online is growing and, as uncertainty has decreased, markets have continued to stabilize (although remain volatile).
- The U.S. Federal Reserve is providing trillions of dollars of liquidity to ensure markets remain open, and the U.S. Government is providing trillions of dollars of stimulus to help mitigate the depth of the recession. Both, in aggregate, are designed to mitigate the damage imposed on its citizens.
- The economic impact is unknown but surely will be great. We could easily convince ourselves the effects will be long term, but similarly, we also could believe them to be short term.
Capitalism, over time, efficiently transfers capital from those who own it, to those who need it for productive purposes. In exchange, the producers provide the owners of the capital with a portion of their profits.
As such, the only thing we can really do is to remain focused on the long term and benefit from that dynamic. Capitalism, and by extension, capital markets, are confusing, volatile, and unpredictable in the short term. They offer siren songs of risk aversion and produce new risk fears at precisely the wrong times.
So, let’s stick to the plans that were put in place during calmer moments. If you don’t have a plan, begin working on one that incorporates what was learned during this recent crisis. Control what can be controlled and ignore the day-to-day gyrations.
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1 Johns Hopkins University, as of April 21, 2020
2 https://www.worldometers.info/coronavirus/; as of April 21, 2020
3 Sources: Bloomberg, World Health Organization
4 Sources: Bloomberg, World Health Organization
5 Source: Charles Schwab