By Guest Columnist BOB WILLIS, CEO, Willis Investment Counsel
For decades, I have maintained a professional diary of my thinking as chief investment officer for an investment management firm located north of Atlanta. Earlier this spring, when the pandemic led to safety precautions at our office, I headed to my mountain cabin to work remotely – which stimulated more thought and reflection, and a lot of writing. Bear with me as I reveal a few excerpts from back then, and now.
Day One. It’s quiet on the screen porch this morning, a nip in the air. With my first cup of coffee in hand, I already have a title and theme in mind for my journal entry: “Negative Wealth Effect + Isolation.” Before getting started, I decided to read the headlines, and a piece by Henry Kissinger caught my eye. It began: “Now, as in late 1944, there is a sense of inchoate danger, aimed not at any particular person, but striking randomly and with devastation.” Those last several words sounded like terrorism. But for Kissinger’s intellect, and extraordinarily deep experience, I might have stopped reading what seemed like shades of hyperbole. Surely, it’s not that dire. But I read on and began admitting to myself there is something unsettling about all of this – increasingly unsettling.
I am more introvert than not, and do not mind being alone. Going on over two weeks now, I have worked from my cabin where I see no structures in any direction – only trees and mountains. I have enjoyed no meetings, not being asked questions all day long, and working in a library-like environment. In many ways, I have been more thoughtful and contemplative up here. Because I do not need a lot of social stimulation, and because my work is often soothing to me, I have not felt inchoate danger; no random threats in this pastoral setting (except for bear scat near my driveway). But maybe I am deluding myself.
More than I realize, maybe I am worried about my daughter, a physician’s assistant (often in the hospital) who says she assumes she has been exposed. (Postscript: she was tested on May 18; negative). I know the emotional anxiety of my older clients weighs on me too. Yet, it has been remarkable how many in their 80s are taking it all in stride. Although I have complete confidence in the resilience of America’s democracy, capitalism, ingenuity, scientists, and grit, I am beginning to admit to myself that a deep and long recession is likely.
I wonder if I will be more or less concerned in six to eight weeks. (Postscript, May 26: More concerned, notwithstanding that the stock market is not). I know the insidious power of extrapolation, especially of what can appear to be a strong trend. I must guard against that.
Enough wandering. Back to Negative Wealth Effect + Isolation, my initial focus for this morning. Over the course of my 40-year career, this will be my fourth notable bear market: October 1987; dot.com unwinding in 2000-2002; the Great Recession in 2008-2009, and now a pandemic. What will be different this time? All such reversals of good economic times have their own story, their own narratives to explain what is occurring, their own causes, and their own recovery path. It is how the storm is navigated, how the ship is stabilized and brought to safe harbor, that most determines the outcome. As this pandemic virus runs its unknowable course, the decision-balance we must get right is far more difficult than a calculation. It is how people feel in the coming months, I believe, that will dictate this new story line.
The wealth effect is well understood in economic circles. A feeling of overall well-being, safety, and financial security stimulates consumer and commercial spending as well as business investment, thereby strengthening the economy. The reciprocal case is equally true. So, how long might it take for the suddenness of the last several weeks to begin taking a serious toll on our collective psyche? When will social distancing morph into loneliness and despair? When does isolation begin to cause shades of depression? And how does such anxiety and worry combine with natural concerns about financial security to alter consumer and business decision-making behavior? (Postscript June 4: Numerous polls and surveys indicate this is now happening; most Americans say it will be at least two months before they return to engaging with commerce).
All this is the negative wealth effect, negative animal spirits, a cautious wait-and-see stance that reduces spending, which will significantly weaken the economy. But this is Economics 101; I know all of this. So why state the obvious? Because too many times I have seen the obvious dismissed with a wave of the hand. I must not do that.
This time, it is the combination of the negative wealth effect with social-distancing (perhaps a euphemism for isolation) that concerns me. What will be the impact of the psychology of isolation – or just limited social engagement? What is the potential effect of losing the emotional battery recharging of going out to bars, restaurants, sporting events, and the Saturday morning Little League baseball game, or finding comfort together at church? It is possible the absence of such comforts, such basic human needs, will substantially worsen the negative wealth effect, deepen negative animal spirits, and reinforce a downward trending economy and market. (Postscript June 5: With predictions of another spike over the summer, the virus continues to threaten a return to normalcy any time soon).
Unlike any recession or bear market over the last 80 years, we don’t have the usual antidotes – though often temporary – to escape our worries and anxieties. Yes, we have social media, FaceTime and related apps, and thousands of in-home movies to stream, but will that be an adequate surrogate for real human interaction? Doesn’t actual human contact still matter? Won’t it be damaging to the psyche to not have a brief “R & R” from the battlefield? Won’t stress levels compound without a release valve? As I close out my journal entry, I am simply wondering how all this reduced socialization, and reduced ability to rest and recharge our emotional batteries, might deepen a recession – or at least prevent a quick recovery. Enough writing for now.
Today. With a bit more perspective now, I still believe getting the psychology right is going to be more important to our analysis and decision-making than stress-testing balance sheets. No one wants to accept the three words that I hear and read over and over from the scientists and public health experts – We don’t know.
How can we have confidence in a quick economic or market recovery (the “V”) when the path or paths of the virus, and the timing of a vaccine or widespread testing, are so unknowable? The current irrationality of the market also troubles me. It’s almost as if the whole COVID situation never happened.
With so many remaining questions, the answers will take many more months, not weeks, to sort out. By the end of all this, I have a feeling I’ll need a new diary.
Bob Willis is the founder, CEO, and chief investment officer of Willis Investment Counsel in Gainesville. Willis oversees portfolio construction, participates in stock selection and fundamental analysis, and also serves on the firm’s investment committee. Prior to founding Willis Investment Counsel in 1979, Willis was a tax accountant in the Atlanta office of Arthur Andersen & Co. Willis holds a bachelor of business administration degree, with high distinction, from Emory University’s Goizueta Business School. He is a former trustee and investment committee member of the State of Georgia Employee Pension Fund.
