2 Years Later

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This week marks the second anniversary of the Covid 19 lockdown. It changed everything. Who knew Planet Earth could be shut down in such a way. But it did.

The last 2 years have been so eventful. Covid united and divided our nation at the same time. Digital solutions took off. Trends that were already in place like e-commerce and video conferences accelerated out of necessity. These trends are irreversible.

We live in complex times. Complexity circles us. Humans tend to prefer consistency with comfort. Covid exploded it. We were forced to deal with it. People have been reassessing and challenging prior norms. There’s a whole lot of reflection going on with priorities being redefined and stacking up in alignment. There’s certainly a lot of talking and fighting. There’s a lot more of that than listening. There’s no sign of that trend slowing either.

I spent some time this week reflecting on where we’ve come from and always try to anticipate where things are headed. I went back and read what I wrote 2 years ago. It turned out to be 3 days prior to the bottom of the Covid crash. Back then I was writing daily. That lasted for 9 months in 2020. I certainly didn’t anticipate that. I wanted to recirculate it as a reminder of where we were and how we navigated through the uncharted territory which has brought us to today. We’ve done it together. Challenges remain. Life is complex. Bedell Frazier is in the Business of Life. The journey continues.

Mike


Bay Area Lockdown – Day 4

March 20, 2020

When the lights go down in the city.
And the sun shines on the Bay.


Those are the opening lyrics for the song “Lights” by the legendary Bay Area band Journey. I’m pretty sure they were not thinking about a mandatory shutdown for their city by the Bay. But it happened.

San Francisco and the greater Bay Area led the charge and started the trend. We are now on Day 4 of the stay at home order. The rest of the state got shut down Friday at midnight. Social distancing is the prescription for preventing the spread. It’s happening now. This has never happened before.

This is a crisis like we’ve never seen. It’s a health crisis that has created a crisis socially and economically. It has been a shock to the system. The US Economy is screeching to a halt. Restaurants, hotels and airlines are seeing revenues evaporate. The Market has certainly responded. It priced in a recession immediately. New estimates on the Street are modeling anywhere from a 14% to 24% contraction for the American economy in Q2. That would be a record. They’re also modeling a steep recovery come Fall. It’s anyone’s guess at this point.

The record books are being rewritten during this Bear Market. The relentless selling had some reprieve this week. There were eight straight days of at least 4% moves in the S&P that finally ended Thursday. Friday brought it back. The previous record was six. That happened in 1929.

Back-to-back up days; it hasn’t happened in five weeks. Trading was smoother on Thursday. It got choppy again Friday. The Tech-heavy NAS has been strongest. The Tech Titans Amazon, Microsoft and Apple held in well this week. These are growth companies with strong balance sheets and little debt. They have relative immunity to the stress in the credit markets, which has hurt other stocks as well as Bonds. Corporate Bonds have weakened as credit quality gets repriced. Price discovery can be challenging, particularly when liquidity dries up. The Fed is providing assistance in Mortgage Backed Securities and the Muni Bond Market. The Bond Market is the most important signal. It still shows stress.

“Whatever it takes” is the attitude in Washington. The Federal Reserve has opened up their playbook from the Financial Crisis. They are throwing massive quantities of money into the financial system to provide support. Congress is coordinating with the White House and a package to provide support for Small Business and the American people could come next week. They need to think big and act fast. It will probably eclipse $2 Trillion in deficit spending before all is said and done.

Back to the Market: We would like to see stronger advances off this week’s low. It’s not happening yet. Retests are probable as the virus news is likely to get worse over the coming days with a ramp-up in new cases. The Wednesday low was not taken out with Friday’s late-day decline. That’s something. We still aren’t convinced we’ve seen the lows yet. California has been shut down. New York effectively has too. Pennsylvania announced similar measures. Others will follow. No matter how you slice it, things are going to get worse before they get better.

There are some irreversible trends as we see them, which will have clear investment implications. Businesses are realizing they can get more and more work done from home. We are proof positive here, as our team is scattered throughout the Bay Area, but still actively working business as “un-usual.” Office buildings and other real estate owners and managers might be in trouble. There has already been a nationwide trend to move away from higher-cost cities and states to conduct business at a lower cost. Working remotely has been very common in some circles. It’s going to expand. Spending will certainly increase for faster networks, virtual software programs, servers, laptops, cameras, in-home entertainment and food delivery.

This is a moment for our nation. How we handle this challenge will dictate the course for our future. This is the ultimate wake up call. We the people are part of the solution. It’s an opportunity to slow things and reset priorities. Americans have always risen to the occasion when facing adversity. Our nation’s history is full of such instances. Challenges can bring out the best in us. We are seeing it in real-time. Scientists, medical professionals, supply-chain, pharmacy, and grocery store employees are working tireless hours, risking their health to support the masses. They’re all American heroes.

Try to enjoy the weekend, best you can. We will get through this. We expect some big meetings in Washington will result in some big announcements. Patience for time and process is required. We will get through this together.

We will be back, dark and early on Monday.

Mike

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