In times of unparalleled uncertainty it is helpful to seek perspective. Reflecting on the COVID-19 induced shut down, I think of it as a storm with wind and rain blowing across a forest. The weak trees fall first. Then, as the wind and rain continues, other trees begin to come down. The longer the storm continues (and the more damage that occurs) makes the eventual recovery later and later before new growth can begin. This is perhaps the simplest analogy that I can use to illustrate what I’m seeing today.

In my opinion, the gross domestic product (GDP) and unemployment impacts of COVID-19 could prove to be more severe than what happened during the Great Depression in the 1930s. In 1929, the stock market crashed, then recovered, and then crashed again in the early 1930s1. Based on the DJIA Index, it took an investor in stocks nearly 25 years to get even with respect to the 1929 pre-cash price levels2. In essence, in my opinion, it really took WWII to get the economy going.

I was taught by my parents who were young adults during the Great Depression to keep 6-12months of living expenses set aside for unexpected events. How many people or companies have been doing that today?

How many corporations can continue if their revenues fall by 20%, 50%, or 75% and for how long? What is the impact of financial engineering (leverage) for corporations around the world? How long will oil stay under $40 a barrel and what will the impact be on drillers and producers? What about the airlines, cruise ships, or hotels? Or restaurants, bars, sporting events, or owners of real estate? What will be the impacts of tax revenues to states, counties, and federal governments? When will any of these areas get back to January 2020 levels?

Unlike the Great Depression of the 1930s, the government now has been quick to act and has provided significant amounts of liquidity for the economy3. The good news is that I believe the people in power understand the situation better and they have more tools to work with; but there are long-term consequences of these actions and there are short-term consequences of their mistakes.

Since bottoming in March 2020 the U.S. stock market is up 36%4 , the corporate longer-term bond market is up 20%5 , and the municipal bond market is up over 12%6. I believe these moves are largely because of the unprecedented amount of stimulus and liquidity being provided by the federal government. This is clearly the good news part of the equation, as the tools being provided appear to be having their intended effects. Alternatively, as for the bad news, it is my opinion that much of the Paycheck Protection Program monies have gone to individuals and companies that didn’t really need the money. Even more importantly, for the longer-term, the amount of debt and substantial increase in the money supply will have far ranging impacts.

While interest rates have been in a downtrend for over 35 years7, I believe this huge increase in the money supply and national debt could eventually lead to inflation and higher interest rates. U.S. Treasuries look expensive and, in my opinion, not worth the risk. Plus, the Federal Reserve has dropped short-term interest rates to next to nothing8 and is increasing the money supply by $4 trillion3. Should another stimulus package be approved in the currently talked about amount of $3 trillion, based on my calculation the U.S National Debt will soar to over $30 trillion next year.

USA GDP of 22 Trillions vs National debt of 23 trillion9,10

Given this, I think that taxes at all levels are going to have to be increased significantly just to
survive – which will ultimately slow economic expansion. Also, should inflation rekindle, interest rates
will rise, further squeezing the government’s budget.

Twenty years ago our National Debt was a little over $5 trillion11. Next year I believe it may be
over $30 trillion. In studying the markets over the last 50 plus years, my knowledge tells me it is a ‘fool’s
game’ to try to time the market. However, I also think it is a ‘fool’s game’ to take more risk than is
necessary to meet your goals. I think now is the time to take lower equity risk, maintain cash reserves for
this year and to be tactical in asset allocation and security selection targeting a conservative return for the
next 1-3 years.

Contact us to discuss how Karpus Investment Management is helping our clients actively navigate these
unprecedented times.


1 Source: Bloomberg, historic DJIA Index returns 12/31/1928-12/30/1932.
2 Source: Bloomberg, historic DJIA Index returns 09/3/1929- 11/23/1954.
3 Coronavirus stimulus pkgs.
4 Source Bloomberg. SPX: S&P500 Index return 3/23/2020 to 5/27/2020.
5 Source Bloomberg. LQD: iShares Investment Grade Corporate Bond ETF return 3/19/2020 to 5/27/2020.
6 Source Bloomberg. LMT3TR Index: Bloomberg Barclays AMT-Free Long Continuous Municipal Index return 3/23/2020 to 5/27/2020.
7 Source: Effective Federal Funds Rate 1/1/1985-5/26/2020.8 Based on 3 month T-Bill rates as of 05/28/2020.
8 Based on 3 month T-Bill rates as of 05/28/2020.
10 February 2020-