Investing in the Age of Covid19

May 2020 14.5% unemployment rate is the highest since the great depression: Source: U.S Bureau of Labor Statistics

Why invest now? 

The current unemployment rate is 15%, a level not previously seen since the Great Depression. The true unemployment rate, which includes individuals not looking for work or those that are underemployed, is 22%. Companies have suspended their 2020 guidance, cut dividends, and stopped share buybacks highlighting the uncertainty of an economy dealing with Covid-19. These factors alone are enough to make any investor rethink investing in this market. However, this is the perfect time to invest if you have stable employment, an emergency fund, and money that you will not need in the next two to five years. 

Source: S&P Dow Jones Indices 

In February 2020 we officially entered bear market territory which happens when an investment drops more than 20% from its 52 week high. When we look at the historical Bull and Bear Market cycle we notice that the upswing is generally greater than the downswing. For example, two years after the dot-com bubble the market returned 101%. After the Great Recession the market returned over 300%. Since February of this year sectors of the market have recovered at a neck breaking speed, while other sectors remain sluggish. This presents an opportunity to purchase high quality stocks at discount prices though be warned volatility will likely continue as states experiment with opening parts of the economy. My strategy is to identify companies that can adapt to the changing crisis and new customer paradigm. 

Focus on the customer 

The impact Covid-19 has had on customers will forever change their behaviors, so it is important to understand how. One of the more obvious changes will be in the way entertainment is consumed. Streaming services will be in demand as traditional entertainment like movie theaters and large crowded concerts are put on hold. Netflix and Disney can capitalize on this because of their compelling offering, strong brand recognition, and user friendliness. Online shopping will be more common as they look for ways to decrease physical interactions while buying goods. Amazon is the king of online retail and can expand its advantage as other companies start to adapt. The intimate engagements with friends, previously at bars and restaurants, will continue through the many online platforms like Facebook, Snapchat, and Twitter as they provide novel ways for us to stay in touch with the ones we love. Another example of a changing behavior will be the fitness industry - classes could happen in garages and yards instead of at a traditional gym. Additionally, consider restaurants who’s requirements for space and wait staff might shift. These small changes will evolve over time as quarantine orders are lifted, but Micro-behaviors will stick around. 

Focus on how businesses respond

As customer behavior changes, businesses will have to adjust to the new reality. Earlier I focused on how to identify companies that are best equipped to navigate the current market, now I want to focus on businesses that will empower those to change their business models. To do this I like to try to think like a CEO and identify problems that need to be solved to stay in business. Operational activities like having meetings and collaborating have to be completed in a different way. Zoom, Microsoft, Amazon and Google have online conferencing and productivity solutions that help to fill these gaps. Customer relation activities like payment processing could pivot from cash to digital solutions provided by companies like Square, Venmo, and PayPal. Brick and mortar stores can pivot to online sales to make up for lost revenue due to closed physical locations. Shopify, The Trade Desk, and Amazon all provide compelling offerings in the e-commerce space. I believe companies that provide solutions in a digital first work environment will perform better in the short and long term. 

So there you have it, my strategy for investing in these uncertain times. I wanted to share this because the last two decades I have watched the rich paint grim economic pictures for the masses while being opportunistic in the market - buying stocks at low prices while convincing others to stay away. With these strategies you can start to operate and behave like the rich, and perhaps yourself build more wealth. If you are nervous - good! Check your assumptions and take a calculated risk, you can decide to invest when the market is high and get marginal returns or invest now while everything is on sale. 

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