One of the most important tenets of investing is that, for the most part, markets are forward looking. This means that the price of any investment reflects what investors (on average), believe the outlook for the investment may be.
As a result, price changes in investment markets tend to be driven by a change in direction of second and third order effects. So, what do I mean by that?
When there was a lockdown this spring at the onset of Coronavirus, any businesses that were not considered “essential services” (or could not operate remotely) were completely closed for a period of time. However, there was a government stimulus called the “PPP” (Paycheck Protection Program) which provided $350B in loans to qualifying small businesses which, if used to cover payroll for workers among other requirements, would be forgiven (i.e. does not have to be repaid).
In fact, the “PPP” was only a small portion of the CARES ACT passed by congress (stimulus package totaling $2.3T), and its size served as a strong signal of the challenges ahead.
Surely, there were many small businesses that did not survive the initial lockdown. Though my belief was that this initial test would not necessarily be indicative of how many businesses would be able to survive once this was all over. Instead my concerns were further ahead.
Specifically, once the stimulus wore off, how healthy would these businesses be? Once people weren’t required to be inside their homes all day long, when (and how many) customers would return? That was (and remains) the real test. In other words, what did the economy look like without government support?
Basically, my argument was that a business receiving government stimulus money that remained closed, in some cases, might be financially stronger than that same business might be after it reopened. Why? Because if the business reopened its doors, and like all businesses it had a combination of variable costs (like hourly workers) and fixed costs (rent, utilities, etc.), and if there weren’t enough customers, it might not be viable.
Still don’t believe me? Anyone who has driven by a restaurant lately has seen outdoor seating that wasn’t there before. In some cases, city streets have been narrowed to accommodate more outdoor seating. Without a meaningfully large improvement in the pandemic, however, restaurants will face some pretty strong headwinds as the weather cools, with lower demand for outdoor dining and limited demand (where it is allowed) for indoor dining.
In a recent article in the Boston Globe (in September), the Massachusetts Restaurant Association was quoted as indicating that 23% of restaurants which were open for business on March 1st have not yet reopened. That’s 6 months without any operation whatsoever. And it doesn’t even consider the restaurants which have put up a herculean effort to survive, yet continue to face terrible operating conditions.
Of those that have remained open, my belief has been that residentially located restaurants with a takeout friendly menu will be best situated, while those with a predominantly downtown lunch crowd (or rely on business events) will have a much, much harder time. This has been referred to as a “K-shaped” recovery, where some firms (and industries) are doing well while others remain in very bad shape.
In this case, I believe the second and third order effects are as follows: After lockdowns that ended months ago, remote work has gone much more smoothly than we might have hoped. Consequently, many workers for whom remote work isn’t difficult may not be back in their offices until next summer. The unintended side effect here is that a lot of retail businesses and restaurants (especially downtown) may find themselves in the dark for that long, too.
Ultimately, while government stimulus can be very helpful (and today, necessary), we can’t expect it to solve all of our financial problems. We’ve adjusted to a very different day-to-day life, but we know we’ll be in this for a while longer, and that’s why getting your financial house in order shouldn’t wait.
If you’re ready to start planning for your financial life to hit the ground running in the post-Covid world, or would like a second opinion on your investments, let’s talk.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.