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Quarter 1



By definition “black swan” events are something which are extremely rare, impossible to predict and have potential catastrophic consequences. The coronavirus has surfaced as our black swan event and it has upended economies and financial markets around the globe. Commerce has come to a virtual standstill as many businesses are forced to temporarily close in order to halt the spread of the virus. Uncertainty has always been the short-term enemy of the market. With a constantly moving timeline as to when the virus will end, there is little near-term certainty for investors. At its worst point in first quarter, the U.S. stock market had fallen more than 30% from its high-water mark just two months prior. The speed with which the market dropped into bear market territory was unprecedented (just 10 days), but it is also noteworthy that the market subsequently gained 17% in just a three-day period, representing the strongest 3-day advance in over 80 years. For the first quarter the S&P 500 was down 20%.

There is little doubt that there will be a severe contraction in the U.S. economy, with the worst data coming in the second quarter. The silver lining here is that most of this information is already baked into the market. What investment professionals will be monitoring is the time-line for when the number of virus cases peaks and how soon it takes to find an effective cure for those who have contracted it. History has proven that these pandemics eventually end. The U.S. has the best medical scientists in the world. Given all of the new medical technology available to us today there is every reason to expect that we will find solutions significantly faster than ever before.

From an investment prospective we need to anticipate what our new economy will look like once we are actually back on the path to economic recovery. Here are some thoughts on what sectors will thrive and what areas might continue to lag once this crisis ends:

  • As many of us grow more accustomed to working from home, technology will play an increased role in our lives. This will drive increased demand for software products which promote video conferencing and virtual classrooms for learning. Bandwidth will need to be increased to handle incremental internet traffic. This will also increase the need for additional data storage, whether it be on individual devices or in the cloud. With all of this new data being transferred between devices there will also be increased demand for software security products.
  • 3-D printing will continue to gain acceptance in order to produce on demand supply of critical components for manufacturers (i.e. specialized valves for respirators).
  • The biotechnology industry will continue to thrive as demand for rapid response cures will be needed to address new diseases and pandemics. This will also drive demand for high throughput medical testing equipment.
  • Some sectors of the economy will probably experience a more prolonged slow-down in demand regardless of how long it takes to solve the current virus outbreak. Unfortunately, the travel industry will likely see a more gradual return to normalcy. As many businesses get accustomed to teleconferencing there may be a more permanent reduction in demand for air travel and hospitality services.
  • Brick and mortar retailers were already reducing their physical footprint prior to the virus, but this trend will now accelerate. Conversely this will stimulate incremental demand for in-home shopping and food delivery services. This will increase the need for additional warehousing facilities, delivery transportation services and logistics software.

Finally, we expect to see permanent changes in our relationships with other countries. China has proven that they cannot be trusted and the U.S. will move to bring more manufacturing capacity back to our country. While China has been a source of low-cost production in the past, our national security interests will no longer allow us to be dependent on our adversaries for critical products such as pharmaceuticals and other key medical products. This will ultimately create new jobs for U.S. workers in the coming years. These are extraordinary times.