Investing in a Black-Swan Environment

COVID-19 threw a wrench into a strong economy, creating both challenges and opportunities for investors trying to navigate new terrain.

By Kent Gasaway

These are certainly challenging times in which we live. Over the many decades we have been serving clients, it feels like we have seen everything. There have been wars, oil price spikes and crashes, mild recessions, deep recessions, computer driven bear markets, and tech and real estate bubbles.

Given the significant amount of uncertainty that has kept the market pundits worried over the course of the past decade like Brexit, the Trump presidency, health-care reform, North Korea, Russiagate and trade wars, it took a virus to bring the global economy to its knees and end the historic bull market.

Such is the case with a “black swan” event, where an unpredicted crisis comes out of nowhere. The swiftness of economic devastation, not to minimize lives lost to COVID-19, has been extensive and brutal.

In the U.S., more than 38 million workers have lost their jobs because of the forced lockdown of businesses and stay at home edicts implemented by cities and states. The unemployment rate spiked from under 4 percent to near 15 percent in a matter of weeks. In response, the avalanche of grants, loans, and government stimulus provided to businesses and individuals, as well as massive bond purchases by the Federal Reserve, has been unprecedented. The world’s central banks are committing stimulus funds that far exceeds, by multiple times, what was done during the financial crisis of 2008/2009.

The tug of war between investors that foresee a V-shaped recovery and those that expect a slow and drawn out recession produces the extreme volatility exhibited in the stock market. As cities and states began reopening, the market rallied. However, a myriad of potential negatives exist including a sustained spike in coronavirus cases and hospitalizations, higher federal and state taxes needed to pay for debt accumulation, a fading of optimism for a coronavirus vaccine, uncertainty surrounding the presidential election, and a potential “new normal” of lackluster spending by consumers.

While the health-care system is important to society, consumer spending is a critical engine of the global economy, providing more than two-thirds of U.S. Gross Domestic Product. Small businesses account for approximately half of U.S. employment, and it will take time to fully recover. Significant industry changes are occurring and some businesses might be permanently displaced. Even with massive help from government, it is uncertain if many small businesses will survive. While ecommerce has been taking market share from brick-and-mortar retail for years, the closing of “nonessential” businesses, which are primarily consumer discretionary retail stores, solidifies Amazon as the retailer of choice.

Though there are so many uncertainties flowing through the market, these are truly exciting times to be an investor.

Video calls have become the new normal. Bandwidth demand will continue to increase, as a growing acceptance of remote working may become a reality. More regulations to keep employees safe in the workplace will be enacted at a time when companies seek to lower infrastructure costs. The list of changes goes on.

We also anticipate that sporting events will come back soon as most sports junkies, desperate for fresh content, like seeing history being made, rather than reliving it in reruns. Though there are so many uncertainties flowing through the market, these are truly exciting times to be an investor.

At Kornitzer Capital Management, our core strategies are based upon identifying long-term trends that provide the “hunting areas” for companies that are the beneficiaries of those trends. We do this so our investments have a potential long-term tailwind pushing their business strategy regardless of the current economic conditions.

For us, long-term trends are decades or more. The changes adopted over the past several months, since “social distancing” has become the norm throughout the world, are hopefully a once-in-a-lifetime event. New “normal” social behaviors, that otherwise would have taken a generation to adopt are being widely accepted overnight.

It will take more time to determine if this is indeed the “new normal” or not, but regardless, when one’s life or loved one’s life is in peril, inconveniences are more readily adopted. As we learn more about the COVID-19 virus and how to treat, prevent, and attack it, society will return to normal. Black swan events come and go, but human ingenuity prevails long-term.

About the author

Kent Gasaway is a certified financial adviser for Kornitzer Capital Management in Mission, Kan.
P | 913.677.7778
E | info@kornitzercapitalmanagement.com