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As the COVID-19 pandemic continues to drive heightened uncertainty and historic daily volatility, we thought an update may be appropriate. We are closely monitoring this rapidly evolving situation, remaining focused on our deep company analysis in order to understand the impacts to businesses’ growth outlooks, as appropriate. As this crisis has unfolded, companies have revised their revenue and earnings outlooks sharply lower. While supply-chain disruptions emanated from China as early as January, the economies of Western Europe and the US are just now experiencing their corresponding demand shocks.

This is part 3 in a series discussing Artisan Partners’ response to the COVID-19 outbreak. Read part 1 here and part 2 here.

With our associates around the world working from home, one of the next challenges was ensuring they were all talking effectively under unusual circumstances. From a business standpoint, it doesn’t really matter if everyone is working remotely if they’re unable to maintain their standard practices and actually get their jobs done efficiently and well. Communication is paramount during periods of uncertainty—not only with and among our associates, but also with our clients and shareholders.

This is part 2 in a series discussing Artisan Partners’ response to the COVID-19 outbreak. Read part 1 here.

Getting a global, 400+ member workforce out of the physical offices and home is one thing. Getting them on the network and ensuring it doesn’t crash and remains secure is another altogether. So how have we done it?

An interesting tidbit: The 11 trading days between Friday, 13 March 2020, and Friday, 27 March 2020, represented the fastest shift in market history from bull market to technical bear market and back to bull market. The next closest was in 1929 but wasn’t particularly close—18 days. (HT: Morgan Stanley)

US initial jobless claims hit a record of 3.28 million last week. For perspective, the previous weekly record for workers filing for unemployment benefits was 695,000 in 1982 (Exhibit 1). From another angle, the latest weekly total is 1% of the entire US population and 2% of the US civilian labor force.

Exhibit 1: US Intial Jobless Claims

Nobody can be positive what future weekly jobless claims will look like—it’s not unreasonable to call current circumstances unprecedented, epic, maybe even inconceivable. But a couple of generalizations already seem reasonable.

The recent COVID-19 pandemic and accompanying market volatility have presented unprecedented challenges for firms globally—Artisan Partners is no exception. The crisis’s rapid evolution—from the World Health Organization’s (WHO) declaration of a public health emergency of international concern on 30 January 2020, to the virus’s identification as COVID-19 on 11 February, to the WHO’s characterizing the outbreak as a pandemic on 11 March—has given the world little time to prepare. Companies who maintained ready-to-deploy, updated business continuity plans (BCP) have likely had an edge in ensuring relatively uninterrupted and seamless ongoing service.

In late-January, it became clear COVID-19 was a risk beyond China’s borders and could pose a threat to Artisan associates traveling or working in remote locations. Accordingly, our corporate crisis management team met on 29 January to assess the situation and determine our next steps.

Global financial markets have been experiencing sharp drawdowns and extreme volatility. Although the catalysts may be unique—COVID-19 and an oil price war between Saudi Arabia and Russia—the occurrence of such dramatic turns in global financial market and economic conditions is not. We believe a narrow focus on sustainability helps account for such unpredictable periods. While we are not immune to these gyrations, we believe we are also in a period of opportunity. We continue searching for companies with sustainable competitive advantages or unique access to growth—characteristics that enable companies to persist through volatility, succeed after the dust settles, and generate alpha over the long term. 

In my nearly 30-year investing career, I have been through a number of stock market routs. This one ranks up there as one of the worst—if not for its depth (which remains as yet undetermined), then certainly for its intensity. The market has sold off faster than ever in history, and I have never seen more days of double-digits or nearly double-digits declines in such a short time period. This makes sense, as it’s probably the fastest drop-off in economic activity we’ve ever seen—one day, everyone’s at work; the next, everyone’s at home and all the restaurants are closed. The panic and fear are extreme, with emotion filling the void where information and analysis normally exist. Yet in every instance during my career, periods of fear and panic have presented incredible bargains; I believe this one is no different. I have learned that when it feels really bad, it’s usually the best time to allocate capital. It is painful and ugly right now, but our goal is buying the long-term survivors and compounders to position the portfolio for strong multi-year gains later. 

Escalating concern around the containment of COVID-19 and its impact on global economic growth has sparked an aggressive turn in risk sentiment over the last few weeks. The selloff in noninvestment grade markets has been unprecedented in terms of speed and severity. The repricing of risk has resulted in high yield spreads moving from under 400bps to more than 900bps in just 4 weeks (Exhibit 1). For context, it took 11 months during the 2008 recession for spreads to cross the same threshold, and more than 28 months during the 2000 downturn.

Escalating COVID-19 concerns and Saudi Arabia’s decision to cut oil prices and boost production have prompted a sharp selloff in global equity markets over the past month. We are monitoring both situations closely and believe the biggest relative performance risk from here is massive volatility. While there will likely be large up days for battered sectors, we expect a drift lower on balance until the true extent of the COVID-19 impact can be discounted into stock prices.