I predicted the arrival of the coronavirus pandemic pretty accurately (see the predictions in this article). We took a defensive stance in our portfolio at the end of February, and switched back to a neutral stance right after the market bottom. For the past couple of months, we have been expecting easing of restrictions and opening of the entire country. Overall, our monthly newsletter’s stock picks delivered double digit positive returns in 2020. Since its inception in March 2017, our monthly investment strategy returned 101% vs. a gain of less than 43% for the S&P 500 ETF (IVV).
Last week one of our readers sent the following message:
“What are your feelings on where we are now? Do you think there will be a second wave as a result of the breakdown of social distancing in many areas around the country? A third wave in the fall? Or have we seen the worst of it already?”
The answer to these questions is easy.
I am now pretty certain that there won’t be a second wave. That’s only because we aren’t done with the first wave and we won’t be done with the first wave until we come up with a vaccine. This may sound like bad news, but it is really good news. When you look at the chart of new daily confirmed coronavirus cases, you will see that the daily number of new cases in the United States is declining at a steady clip even though our testing capabilities are increasing and we are testing more and more people each day.
We have anecdotal evidence that most Americans aren’t very mindful of the social distancing guidelines and a large number of Americans aren’t wearing masks properly, yet the virus is spreading to fewer numbers of people in each iteration (its R0 is below the critical 1 level). At the end of April the number of daily new cases was around 30K. At the end of May, it stands at 20K.
You need to keep in mind that these are “confirmed” new cases. The actual figure is probably 2-4 times more than this figure. Assuming that we have 60K people infected each day and that this figure is declining at a 10% rate every 6-7 days, the “actual new cases won’t decline below 10K by the end of the summer.
The sad thing is that we could have actually reduced the number of new cases to double digits if we had more competent leadership (Donald Trump and almost all governors sucked at their initial response to the pandemic). Germany, Spain, and Italy were equally incompetent in the beginning, but they managed their quarantines much better than we did and today they are reporting around 200 daily new cases, which is 1% of what we are reporting. Again, this is good news because it shows us that it isn’t just the South Koreans, Taiwanese, or the Icelanders who can control the spread of this pandemic. Any country that follows decent testing, contact tracing, and isolation protocols can easily keep things under control.
We didn’t do a good job for the most part and today COVID-19 is still a very significant threat to older Americans. As a result, a large number of older Americans will choose to self-isolate and won’t participate in the economic activities in the coming months. This will reduce our death rates, but our GDP for 2020 will be lower than what it could have been. We will also experience higher unemployment figures.
Instead of preventing/containing the coronavirus pandemic, we surrendered and opted to paper the economic fallout by printing around 4 trillion dollars. This had a perverse consequence: the unemployment rate reached 14.7% and personal consumption plunged 13.6% in April, yet personal income rose 10.5% and savings rate skyrocketed to 33%. Today, millions of Americans are making more money by staying home than by working.
The number of new coronavirus cases is already increasing in California, Texas, and Florida. Our coronavirus defense policy is now very similar to Sweden’s policy. This would have been the best policy to follow if we knew that there won’t be a coronavirus vaccine in the next couple of years. However, it is very likely that at least one of the 100+ plus companies working on a coronavirus vaccine will be successful in the next 6 months. This means thousands of people in the U.S. will die unnecessarily until then.
If you are above the age of 60 you should minimize your contact with other people and always wear an N95 mask in public for the next 6 months. And if you are above the age of 60 and concerned about your nest egg, this is the time to be extremely aggressive in terms of portfolio allocation. I am not going to reveal which stocks you should be buying today in this article (we have premium investment newsletters for that purpose) , but I am going to tell you that you should allocate 0% (zero percent) of your nest egg to government bonds. The stock market declined 6% yesterday and gave you another opportunity to increase your stock allocation and goose up your future returns.
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Disclosure: None. This article is originally published at Insider Monkey.