Economies have survived past global crises, but the coronavirus seemingly has launched a new chapter in modern human history. As with 9/11, it’s likely that business won’t return to pre-pandemic normal. In many respects, the industrialized world is treading new ground.
Arkansas Money & Politics asked North Little Rock’s Sowell Management, one of the state’s largest investment advisory firms, for its take on the impact of COVID-19 in Arkansas and beyond. Sowell’s investment division, Sowell-Affinity, directly manages more than $1 billion in client assets. Three of its tenured managers, with a combined 100-plus years of institutional investment experience, graciously availed themselves of our questions.
AMP: Where are we exactly with COVID-19 from a financial perspective, and is it too early to provide a prognosis of the ultimate impact to the economy?
David Sugimoto — This is something that is unprecedented in the careers of even the most seasoned investors. The reason is that this was not created by any excess in the market, i.e. debt. Debt has been at the heart of all recent historical crises from the housing bubble in the mid-1980’s, the Asian crisis in 1997 and the global financial crisis in 2008. It was not even created by some other excess in asset valuations — the normal causes that bring markets down.
This time, it comes from a mandated lockdown of certain segments of the economy, and a restriction of many elements of it are now legally prohibited from working and earning – entertainment, sports, hairstylists, cleaners, restaurants, retail, etc. Therefore, where we are on the curve is impossible to know with any level of confidence. We don’t even know what is going to be the “All Clear” sign.
Is there a point on the infection curve when epidemiologists tell us the worst is over?
Or is the pressure to get the economy back on track going to overtake the risk/reward calculation and X number of deaths/infections are at some politically acceptable level (to borrow a term from the military, “acceptable losses”)? To answer the second question, there is no data or information to base any prediction on.
Alex Hsiao — It’s debatable whether the U.S. was slow to medically respond to the virus pandemic, but the economic, fiscal and social impact we are feeling from the “stay-at-home” has been immediate with the catastrophic unemployment figures we’re seeing. At this stage, it’s less important what the financial prognosis is and instead how deep and economically altering the effects of the virus or stay-at-home is if life or some form of normalcy doesn’t resume soon.
Although there hasn’t been like events, as such we can certainly draw from some combination of history whether it’s the Great Depression or the Financial Crisis to understand the breadth and sizeable impact it had on everyone’s lives: whether it be depleted pensions, massive unemployment, home foreclosures and displaced professions and businesses. As people have been saying, the effects of the virus are indiscriminate, and it doesn’t matter what political party, ethnicity or demographic you come from, we are all at risk. The sad part to all this is the “stay-at-home” may save our lives but we may come out of this with our life completely altered. The sooner we can resume life and adjust to life with the virus the lesser the impact.
AMP: Which sector(s) likely won’t recover fully from this pandemic?
David Sugimoto — All the major sectors will make a recovery eventually as the world will still need energy, retail, financial services, etc. However, underneath the major sectors is where the big upheavals will occur. Brick-and-mortar retail, which was on the ropes already, will suffer greatly – this just accelerates the move to on-line, delivered-to-your-door retail. Also, small mom-and-pop shops will suffer as well. A lot of small businesses were in the twilight of their years because many of them were started and run by baby boomers who are now reaching retirement age. Given that, many of them either planned to sell or pass it on to their children.
Either way, the asset value has been destroyed. Small universities that were in precarious financial situations will also undergo a massive restructuring as students go on-line. The sense of community, one of great selling points for small schools, is gone. Even the clothing industry could be affected as this massive global “work from home” experiment results are digested – jeans and T-shirts will do to business casual what business casual did to suits and ties. Finally, what economists call the unknown and unmeasurable effects – how many startups will never get off the ground.
Greg Lai — I really don’t see a “sector” that is impacted long term. There are businesses and industries that will have to change parts of their operations around health and disease transmission. For sure in the airline and cruise industries. On the margins, small local businesses that can’t weather two to three months of a lockdown won’t recover. Bigger picture, much like after 911, there will be a “health infrastructure” deployed to react or prevent another situation like this.
Alex Hsiao — Like all crises, there are winners and losers. It’s never what sectors or industries will fail but who are the new players that rise from this. Some of the lagging industries like the brick-and-mortar retail businesses even before the crisis have an accelerated timeline. Industries or companies such as transportation and automobiles that are heavily in debt are less nimble to respond, and it may be up to the federal government to bail them out as we saw during the previous financial crisis.
At the same time, there are industries that will thrive from this crisis due to dependency and new life-altering behaviors like pharmaceuticals, communication services and consumer staples that are life essentials.
AMP: Best guess for a timeline on returning to normalcy. Will we ever fully return to it?
David Sugimoto — This is as much a medical and political question as it is an economic one. Until someone articulates the endpoints or signals that the worst is over, no one knows. The decision to lift the quarantine will be determined by policy, not economic forces. The big question for “down the road” is what is going to be the new normal? Also, after dumping $ 2 trillion into the American economy, what will this do to inflation after a decade of low inflation?
China is appearing to have peaked in incidence, but the isolation measures the government put on its population were probably too severe for other countries, e.g. children being isolated from parents for weeks or entire apartment buildings being totally locked down with no leaving.
Alex Hsiao — The one certainty we have is that “shelter-in-place” was a human decision that we can change, and that we all know we can’t be in this position forever. We can wait for a vaccine and depending on whom you ask, it could take over a year before it’s commercialized, but there’s no guarantee there will be a vaccine.
So, normalcy is learning to live with the virus and establishing preventive behaviors for people to go back to work and school. As our parents used to say, be a “defensive” driver. Our timeline will be how quickly (and willing) we can look to our neighboring countries who’ve adapted already and learn to be socially defensive whether it be social distancing, face masks and quick and effective virus testing.
Greg Lai — I think that information and data is key to fashioning a return to normalcy, and any acceleration in this data collection accelerates recovery. My hope is that the timeline is bounded by a high confidence level and that over a period, say 12 months, we’ll have more than enough treatments and a possible vaccine, and this is the outer bound of the limit. The inner limit is all the things we do to 1) reduce the current spread of the infection and then the effort to find simple and effective steps to return to normal life. That will show itself over the next couple of weeks as “social distancing” shows its effectiveness, quick and effective testing comes online and then pragmatic and maybe innovative steps come from those outcomes and hopefully sling shot us back to pre-virus lifestyle. So, a late-summer time frame for some normalcy seems reasonable. I am hopeful.
AMP: What is the best advice for both business owners and individuals in terms of riding this out?
David Sugimoto — This isn’t novel or new, but in some form these crises pass, and things will return to normal. But undoubtedly, a new normal. There is nothing to do but wait for this to pass. It will not be easy. The longer it goes on, the messier it is going to be.
Alex Hsiao — Our best advice is to not give up hope, be informed and leverage all the government assistance that is available to you. Do what you think is sensible and persevere; we will come out of this stronger. The one thing we know is to remind ourselves we’ve been through crises before, and we have survived.
Greg Lai — I think that small-business owners will take the brunt of the crisis, though I am more than hopeful and optimistic that the recovery will be robust and imminent. I also think that the high unemployment numbers are reasonable because to some extent, the best “triage” is to leverage the enhanced unemployment benefits offered by the federal response package. Companies rather smartly can “save” the business by quickly passing the “labor” liability over to the government.
Strategically, this makes huge sense because many if not all those workers can be “re-employed” once the crisis is over. Quite possibly, this could be highly frictionless for those service businesses that are hit the hardest. Let’s be prepared to focus on recovery and look past the short-term pain. Ironically, we’ll get a good look at the recovery by looking at patient zero, China’s economy.