CIO Outlook: Stop Treating the Stock Market and Treat the Virus

Julian Koski, Co-Founder and Chief Investment Officer, New Age Alpha
Mar 16, 2020 3:35:54 PM 6 min read

As the COVID-19 pandemic envelops the globe, we at New Age Alpha feel compelled to address what we see as a fundamental error on the part of our government and policy makers. Regardless of party affiliation, we believe current efforts across the political spectrum are making a grave mistake by pinning their efforts so myopically on the stock market. In fact, we believe these attempts to prop up the market are not only inefficient, but they may be making the situation worse.

 

First Step: Admit Ignorance

All would agree that the COVID-19 pandemic is both a medical crisis and an informational one. There is still so much that is unknown about the virus. Already, social media disinformation teems with incorrect and potentially deadly treatments. Donald Rumsfeld was once lampooned for delineating the difference between ‘known knowns,’ ‘known unknowns,’ and ‘unknown unknowns.’ Yet, with hindsight, he wasn’t off base. In times of a crisis, it’s critical to acknowledge the limitations of knowledge and act accordingly. In effect, one must acknowledge human bias. If a patient arrives with appendicitis, the approach is concrete, definite: remove the appendix. A viral pandemic is exponentially more complicated, though, involving a multitude of unknowns. In such a dire situation, the economy—as a metaphor for the patient—should be treated in a completely different fashion: wait for symptoms to surface and then treat them accordingly.

Instead, what have our leaders done? They’ve focused to a fault, we would argue, on the stock market. True leadership was—and is still—needed in the form of assurances and material support. Trillions go to the stock market while a fraction of this goes to stopping the virus. We know we will need hospital beds, we know we will need medicine supplies and respirators. In terms of addressing “the five inches in front of our face,” it is incontrovertible that these supplies will be critical. Instead, the White House and the Federal Reserve have worked to cut interest rates and increase appetite for equity assets. This doesn’t do anything to help the morale of the 80-year old in a flyover state terrified that she's peering at her final days.

 

Primum non nocere

"First, do no harm,” is a phrase known the world over as a fundamental precept taught to all medical students. Though technically not a part of the Hippocratic Oath, it is commonly associated due to each’s unblinking moral focus on the patient. It is not an oath those in government are required to take. And it shows.

On Friday, March 13th, officials unleashed a historic amount of stimulus to the tune of $1.5 trillion. We couldn’t help but note the cynical timing...3:00 p.m. EDT, just as the market was gearing up to close the session for the weekend. And then, late Sunday, March 15th, they brought interest rates down to zero for the first time in the U.S. and announced what is essentially a $750 million fifth round of qualitative easing. We’ve all seen the results.

The fundamental flaw in this approach is the government is trying to treat the economy without knowing what is broken. The H-Factor, the unknown risks, abound. A proper physician would be standing by to reassure the patient that he or she is ready to utilize the best resources to treat symptoms as they surface. Instead, it’s become apparent, sadly and unfortunately, that the government’s current actions are to maintain stock market performance in a blatant attempt to save a reelection bid. And in the process, as is also apparent, they’re all but ignoring the barren shelves and ever-increasing health and safety fears of their constituents.

 

Catastrophic False Positives

At New Age Alpha, we would take this one step further. By feeding into a human bias that pegs the severity of the pandemic to the market, we believe such a band-aid approach may be making the situation actively worse. The government’s overall tack has been one of confidence (“One day, it’s like a miracle, it will disappear”), yet such bluster lacks any reasonable quality of precaution or attentiveness to the importance of Social Distancing. Further complicating matters has been the repeated inaccuracies and outright contradictions from those entrusted to lead. While no official statistic exists, anecdotes have emerged of a Saturday night in major cities with virtually the same number of people as normal. This is terrifying. If true across America, it means the government has utterly failed in its primary job to treat the symptom at hand. Rather than truly leading and approaching the pandemic with the respect it deserves, their nonchalance and market-fixation has likely fed into dangerous human biases.

 

Simply Look at Existing Precedents

And it’s not as if we’re bereft of historical warnings. In 1918, as the Spanish Flu spiraled out of control, Philadelphia decided to hold a parade despite the risk while St. Louis chose to cancel theirs. The ultimate result? Whereas approximately 700 people eventually died in St. Louis over the following month, Philadelphia saw over 10,000 perish. Meanwhile, during the 2007-2008 Global Financial Crisis (GFC), the efforts of the Central Banks could serve as an important barometer for what can and can’t be done via economic stimulus. While few would argue their efforts did, indeed, prevent the complete collapse of the global economy, the program wasn’t without its own inefficiencies. Initially, officials confronted a problem that came to be known as, “pushing the string.” Essentially: they could offer all the supply to the market they wanted, but they couldn’t create demand. And that was a strictly financial crisis!

Our current crisis is a health crisis, first and foremost, and it is, therefore, exponentially more complicated. If we know such efforts displayed limitations in a crisis of such specificity, why would we use the same approach against a pandemic that is so multifaceted? Specific needs for supplies and equipment will naturally occur as symptoms of the pandemic; there is no need or ability to start addressing them via the market. The GFC eventually hit Main Street, after first afflicting Wall Street. The COVID-19 pandemic, however, is already on Main Street’s doorstep.

 

Leadership Failure

The government’s role is to lead. In times of crisis, they should inspire the public’s confidence in the ability to make it through to the next day. Unfortunately, we’ve seen anything but this from the federal government. If your mother arrived at your doorstep coughing, unable to breath, would you offer to review her investment portfolio? No. That’s preposterous. You’d treat the symptoms at hand. So, it should be with the COVID-19 pandemic. We believe the government is addressing unknowns when they should be focusing on the knowns. Rather than trying to manipulate the market, we believe they should be treating the economy as one would treat a virus. There are no quick fixes, there are no short cuts, it can only be treated symptomatically.

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Julian
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Co-Written by Julian Koski, Co-Founder and Chief Investment Officer and Matthew Waterman, Investment Writer