Not Depth…Duration

There’s a bumper crop in superlatives these days, The biggest weekly increase in initial jobless claims in history. The fastest 30% drawdown in history. The worst daily Dow Jones point loss ever. It goes on and on. We are living through a historic moment that is rewriting the record books as we watch.

And when I talk to people on the street (via text, relax) who aren’t obsessing over daily stock market minutiae, the question on everyone’s mind is “How bad is it going to get?” They’re asking me about the economy or their 401(k) accounts, I highly doubt they’re asking me about the spread of the disease – after all, I only have two areas of unquestionable expertise: Investor sentiment and Italian food.

But the point I want to make is that there are two perspectives on “How bad is it going to get?”

If you ask that question of a hospital administrator or a state’s governor or a doctor or a nurse, the answer to that question would likely have to do with the depth of the crisis. The depth – as in “How many infections? How high will the death rate go? How high will the death count rise? How many recoveries? How many ventilators are we short? How many hospital beds will we need? How many people will be out of work? How high will the unemployment rate rise?”

These are depth questions. Questions of how far we’ll fall in these categories before it’s over.

But for Wall Street, the Fed, investors and fund managers – to whom all of these questions are also important – I would argue that the depth will matter much less than the duration. We all know the economy is going down big. Has gone down big. But the stock market is a discounting mechanism. Its participants make forward-looking bets based on how they feel about the future. But we don’t have any evidence yet of what the future is going to look like, because we have not yet seen an end to the spread, or the death count. We haven’t seen the peak of expenditures or emergency actions.

Investors will be willing to bet on what the world looks like after, but only when there’s a sense of the When. These are duration questions: “When will people be back to work? When will the extraordinary stimulus and monetary policy begin to be felt. When are the peaks for infection and death in each region of the country? When will shuttered businesses begin to reopen. How long will it take for laid off workers to get hired again?”

Investors are thinking in terms of how much longer while others think in terms of how much worse. These aren’t totally distinct questions, however; there is a great deal of overlap. When one is attempting to calculate the severity of the crisis, she must also consider its length, and vice versa.

I don’t think it’s true that investors would trade a worse depth for a shorter duration, as has been suggested by the “Go back to work, life will go on” crowd. I’m sure there are some who feel that way, but probably not the majority of people.

Just as there are no answers to the depth question – How bad will this get? – there are also no answers to the duration question – When will this be over?. We all can make guesses, but I think absent a peak in some of the depth issues, it would be impossible to gauge the potential duration.

The fog this creates lends itself to continued volatility. I would like to think we’ve seen most of it, but I’m not so sure.