From an email sent out to all investors…

Good morning, IIM investors.

As COVID-19 cases continue to rise, new restrictions and lockdown measures are being considered. Some states have implemented curfews, dining restrictions, and mask rules in an attempt to curb the exponential spread of the disease. This has often been a heated political issue as the balance between economic activity, personal liberties and control of the coronavirus is debated. At the same time, death rates have remained steady and progress is being made on possible vaccines.

How should investors react to the ongoing pandemic almost a year after it began?

Unlike the beginning of this year when policymakers and investors were flying blind, much more is known about the disease and its impact on the economy today. There is clearly a trade-off between economic activity and control of the virus due to how easily it spreads. The first nationwide shutdown was a blunt tool but likely helped to slow the spread significantly, especially at a time when the healthcare system was under stress. Fortunately, the economy was resilient and has recovered quickly since shutdown measures were lifted.

Although COVID-19 and its economic impact have affected all aspects of life, it’s important to separate personal views from investment strategy. Whether or not one agrees with the severity of the disease and the appropriateness of public health measures, it’s clear that staying invested and disciplined with one’s portfolio has been the right approach. With the benefit of hindsight, there are at least three key takeaways that should be considered.

First, although complete state- and city-wide shutdowns may have been necessary at first, the hope is that they can be done in a more targeted manner going forward. Ideally, public health officials and governments can restrict specific areas and businesses only when needed, preserving the ability of most businesses to operate and individuals to work. This is only possible up to a point, though, and depends heavily on prevention and safety measures.

Specifically, the full nationwide shutdown resulted in a GDP decline of 31.4% in the second quarter (on an annualized basis). However, the economy then came roaring back by 33.1% in the third quarter even as some parts of the country still faced restrictions. While many businesses and workers in impacted industries such as retail, dining and hospitality are still struggling, this is evidence that a better balance can be struck. Current estimates are for GDP growth to moderate in the coming quarters, but the economy can still fully recover within the next year at this pace.

Second, many businesses and individuals have had time to adapt to working remotely, social distancing, wearing masks, and more. Office workers are now accustomed to online video calls, many factories are set up with health safety measures in place and retail stores have reduced capacity. Many companies who were able to switch to remote work seamlessly have not only survived but have thrived in this environment. While less than ideal for productivity or collaboration, the ingenuity and adaptability of businesses and individuals when facing a crisis are also reasons that growth can continue.

The result of businesses adapting can be seen in various metrics such as the ISM indices which measure manufacturing and non-manufacturing activity. These have been above 50 since June, a sign that activity has been rising. Hiring activity also recovered quickly as stores reopened and furloughed employees were allowed to return. More than half of the jobs lost during the shutdowns have been recovered, those seeking jobless claims remain high – but have declined significantly – and the number of open positions across the country has begun to increase again.

Third, the stock market continues to look forward and is even approaching new highs in spite of rising COVID-19 cases. This is due largely to the factors above which have allowed businesses to operate and grow. Current earnings estimates mirror forecasts for the economy and suggest that profits can return to pre-pandemic levels by the end of 2021. Investors who stayed focused and diversified this year would have done well despite all the market volatility.

The stock market has also cheered positive news of the multiple vaccines under development. While these are welcome signs, much is still uncertain about the efficacy and approval of these vaccines, let alone how they will be rolled out. Ultimately, it’s clear that the economy can continue to grow without a vaccine in the medium-term…even if one is needed just to return to a sense of normalcy in the long run.

While the ongoing pandemic is affecting all aspects of everyday life, and there are still many uncertainties ahead, it’s important to remain focused on the economic trends and the experience of the past several months. Below are three charts that may help put this in perspective…

1. Global COVID-19 cases continue to accelerate

COVID-19 cases are accelerating around the world, especially in Europe and certain parts of the U.S. This comes after several months of stable case rates.

2. Cases are rising in many parts of the U.S.

Many states are seeing an acceleration in new COVID-19 cases. These include those that were affected later, such as Texas and Florida, as well as states that were hit hard at the outset such as Illinois. Each state is taking different measures which include curfews, mask rules, and more.

Nonetheless…

3. The economy continues to grow despite the pandemic

Economic activity began to surge once restrictions were lifted in the summer. Today, many businesses and individuals have adapted to social distancing and remote work measures. For investors, there is evidence that the economy can continue to operate even with targeted shutdowns and other restrictions to control the spread of COVID-19.

The bottom line?

Investors who stayed disciplined and persevered earlier this year were rewarded. As we near the end of a long and unpleasant year, staying focused on the long run remains the best strategy.

Please let me know if we can be of further help.

Thank you and good weekend.

– Cale