The year is 2020. The streets of New York are quiet, the stores are all closed, and the government has mandated everyone to wear a face mask outside. If you thought this was an intro to a dystopian novel, I couldn’t blame you. These past few months have been surreal to say the least.

Things that were completely unimaginable to Americans pre covid-19 have taken hold. Countrywide lockdowns, record unemployment, unlimited quantitative easing, escalating tensions with China (okay, maybe that last one wasn’t so surprising). You would think with everything that’s going on that the odds of a swift market recovery would be pretty low.

And yet as of this writing, when most of the U.S. economy is still shut down, the S&P 500 is sitting at 2390, just 13% off its all-time high in February. If that’s surprising to you, it should be.  

How on earth are these companies getting such a favorable valuation when most of them have withdrawn their guidance for 2020? To say that we’re even close to where we were in February economically seems so out of bound that I find it incredibly hard to understand how this can be rationalized.

The Stock Market Depicts the Future, Not the Present

Yes, the market is a forward-looking machine and it has already ‘priced all the economic damage in.’ This is the most common argument I hear and under normal circumstances, I might’ve accepted it. But this is not a normal circumstance (far from it…) and I think the advocates for this are making a lot of assumptions about how events are going to play out.

The U.S. Economy is Reopening

Yes, more and more states are announcing that they’re going to ease restrictions and let businesses resume operations again. “The U.S. economy is open for business! Things are going to pick up where they left off. There’s pent up demand and everyone’s going to want to start spending and travelling after being cooped up for several months.”

I think there is some merit to that and to a certain extent, I do agree. However on the other side of the argument, this statement seems to overlook some of the lasting psychological damages that covid-19 has had, especially to those living in metropolitan areas that have been hit the hardest.

Think about it: how many of us are going to be eager to get on a plane after this? Or reserve a table at our favorite restaurant? I’m willing to bet that there’s not going to be as many as there were back in February. And if we’re looking to China and South Korea as the examples, then I’d say foot traffic definitely won’t be what it used to be once we open up again.

Travel will undoubtedly take the biggest hit. Airports and airplanes are just a bastion for germs and viruses to linger and spread around. Personally, I don’t see how some airlines are going to survive this. They can get rid of the middle seat, sanitize everything, ask their patrons to stay 6 ft away in the waiting line, and arm their entire staff to the teeth with gloves and face masks. Regardless of all their efforts, I don’t think it’s possible to eliminate/significantly reduce all possible points of contagion without severely impeding their bottom line. And Americans know this. Granted, there’s always going to be a certain number of us that are going to want to travel, irrespective of the potential risks. I’m just arguing that the number will be far less than what the experts are imagining and what Mr. Market has “priced in.”  

The Worst is Behind Us

There seems to be a common sentiment going around that covid-19 was not as bad as the experts initially thought and that the mortality rate is somewhere around 0.5% instead of the initial 2%. While there may be no way to prove this, I do think that a lot of people are taking for granted that the lockdown curbed the spread of the virus from getting any worse. Social distancing is a successful tactic and we imposed it based on its effectiveness in 1918 with the Spanish Flu.  

There’s no empirical evidence that suggests that once we come out of lockdown, the virus won’t start spreading again. Again, if we look to China and South Korea, they are still facing challenges in getting this contained despite having earlier success. Just today, South Korea announced that they are facing a new cluster of coronavirus cases in Seoul, prompting the government to scrap their idea of reopening schools. In Florida and Georgia, two States that led the charge in reopening, they are seeing a steady uptick in the number of coronavirus cases with each passing day.

How Does This Relate to the Markets?

(I was getting to that!) Which brings us back to the markets… For the S&P 500 to be 13% off its all time high, you would naturally assume that the underlying conditions that plagued the economy back in March have been slowly eroding away and that businesses are returning back to normalcy. Except that hasn’t happened… Markets are still in an air of uncertainty as they were back in March, businesses are still shut down (some are filing for bankruptcy), millions of Americans are unemployed (14.7% in April! Not counting the furloughed, which in my opinion is just another way of saying ‘future unemployed’), and consumer sentiment are at levels not seen since ’08. So how are we where we are today? The only answer I can arrive at is all the stimulus being injected by the Federal Reserve and their buyback programs (which is a whole another article in and of itself). Stimulus may be a temporary boost for companies that are struggling, but it is not a suitable replacement for driving revenue and organic growth.

But Wall Street is NOT Main Street!

This is a sentiment that I don’t really understand. Yes, we are seeing a bigger divergence between the stock market and Main St than ever before. However, taking away all the fluff and investment vehicles that are out there, the core driver of the U.S. economy is still consumer spending. If you don’t have consumer spending, then companies won’t have any revenue to build out their business. It’s true that they can get funding from investors or VC’s, but that will only take them so far. Without consumer participation, then there is no actual real growth. And the market dynamic has changed dramatically compared to what it was a few months ago. Companies are going to have to adapt to the ‘new normal’ and that doesn’t happen overnight and without significant costs.

A Brave New World

I think covid-19 is going to have a profound effect on the world and it will be the catalyst for a paradigm shift… one that changes business dynamics and accelerates trends that we’ve seen already. Companies that are brick and mortar are going to have to find a way to moderate foot traffic in their stores. People are going to flock more to online shopping than going to malls. For large scale institutions, there’s going to be a greater emphasis on employees working from home. Barring the discovery of a vaccine, things aren’t going to return to normal anytime soon.

I’m not here saying that there’s going to be a deep depression and that we’re never going to get out of it. Americans are resilient and I truly believe that we will get past this sooner rather than later. However, when you hear about the speed of this recovery and the pundits talking about a ‘V’ shaped recovery, I just want you to take a step back and re-evaluate the situation again with a holistic perspective. Consider that maybe, we’re looking at this through rose-colored lenses. And that everyone might just be in a euphoric state from the recent rally.