Clients, friends, and colleagues. In three-and-a-half decades as financial advisors, we’ve written hundreds of commentaries and letters trying to help people make sense of the world around them. We’ve tried to put things in perspective. Tried to bring comfort in uncomfortable times. To add clarity where none seems to exist. To tell the plain unvarnished truth about the present and the future so people can make smart choices and avoid costly mistakes.
This one will be a doozy, so strap in.
We are living through an historic event. Never before has this country (or the planet) been faced with defending itself against an unseen foe like this virus. It’s literally rewriting the rules of social conduct and the business community’s responsiveness protocols. But these are not the end times. Not by a long shot. As I’ve said a thousand times, history is always most painful when you’re actually living through it.
This summary is based upon the latest information we have collected through Sunday – not from cable news or from Facebook posts – but from the experts in government who are leading the effort to contain the outbreak and from seasoned professionals in the financial markets. There are a lot of moving parts here, so I’m going to summarize my comments into three areas:
- The actions of federal and local government officials to minimize the impact of the outbreak and where we’re headed.
- Expectations for short-term economic impacts and the mid-to-long term forecasts for economic recovery.
- The behavior of the investment markets so far and what we can expect in the coming weeks and months ahead.
As we write this on Sunday, Congress is working around the clock to quickly approve and enact an historic economic aid package valued at more than $2 trillion dollars. The details are not yet finalized, but the primary pillars fall into three distinct areas:
- An immediate financial aid package for individuals and families. It’s unclear how much families can expect at this time, but the goal is to assist people in bridging the gap until the outbreak passes.
- A comprehensive aid package for small businesses to help keep people employed and compensated for the next 30-90 days.
- An economic stimulus program to make interest free loans available to major business such as airlines to minimize economic damage during the downturn.
It should be noted that in the Financial Crisis of 2008, it took Congress more than 6 months to deliberate and enact a similar aid package that was much smaller than this. (Remember TARP?) We expect his package to be approved and put into action in the coming week. The lessons learned in 2008 are fast tracking this aid package, and it should provide both individuals and businesses with the resources and support necessary to blunt the downturn in the economy and in financial markets. Time will tell.
In addition, local and federal governments, with the cooperation of the business community, have been systematically and gradually reducing activities that could lead to a wider spread of the virus. People have been strongly encouraged (but not ordered) to stay at home. Airlines are dramatically reducing travel. Libraries, museums, beaches, restaurants, and other public gathering spots have been closed. Subway and train travel have been curtailed. Yes, you can still go to the grocery store. And the pharmacy. And the gas station. And get take-out from many restaurants. We don’t expect this to change. But we do understand the motive behind it. There’s already successful examples of how these strategies can “blunt the curve”, that is, reduce the severity of the virus’ spread until it runs its course. Italy offers us two stark examples:
On February 19th, patient zero tested positive in Codogno, Italy, a small town in the Lido province. Two days later, his doctor also tested positive. The mayor immediately ordered all residents in the region (app. 50,000 people) to stay at home except for essential trips to the store, etc. Today – one month later – all the patients diagnosed in the first week are well again, and the daily count of new cases has declined daily. Codogno is gradually reducing the social distancing restrictions, and commuters are allowed to return to work. In neighboring Bergamo, however, life continued as normal for two more weeks before the government locked down the country. Bergamo now has more people with the virus than anywhere else in Italy.1 Social distancing and limited travel and interaction are essential to ensuring we experience Codogno’s outcomes, not Bergamo’s. This is the motivation behind federal, state, and local government’s actions. So, stay home.
Now some good news: China’s new case numbers have declined to almost nothing. They have closed all 14 of the temporary hospitals built for the outbreak. The worst has passed for them. In South Korea, the number of recovered patients now outnumbers new cases every day. This thing does end, and it ends far faster for those who follow the instructions.
Expectations for Economic Impact
Clearly, the events of the past two weeks will have a significant short-term impact on the economy. Expectations are a mixed bag, but the general range by forecasters suggests that Gross Domestic Product (GDP), the main measure of an economy’s health, could contract by as much as -20% in the second quarter. (This is essentially what the stock market has already priced into current stock prices, but we’ll get to that in a minute.) This is a moving target, as it’s still unclear how much the current efforts will serve to dampen the curve nationally so life can return to normal. There are some harsh realities: Many small businesses, even with government assistance, will likely not make it. Unemployment numbers will initially spike significantly over the coming weeks. Corporate earnings in the second quarter could drop by as much as 50%. The numbers are meaningful and a little scary – yes. But remind yourself that this is not a long-term trend in the economy. We expect the massive contraction in the economy will run its course and as the health crisis passes, the numbers will begin to improve due to the stimulus package and the return of normal life. This will pass. Whether its one or two quarters, or the rest of the year is anyone’s guess at his point. But of this we are certain: Life will return to normal. And the economy will return to growth and expansion just as it always has. As more data comes in and the next few weeks pass, we’ll get a better bead on all this and relay it to you. Be patient.
Investment Markets So Far and What to Expect
There’s no doubt the behavior of the markets has reflected the level of uncertainty of the depth and length of this disruption. In the long run, markets are very efficient at pricing all known information into prices. They’re crazy good at it – in the long run. But in the short run, not so good. In most instances, they tend to overshoot both positively and negatively in the short run. The declines we’ve witnessed in major asset classes – stocks, bonds, and commodities – have factored in that expected -20% decline in GDP and a 50%-60% decline in corporate earnings for next quarter. That is – they are baked into the current market prices. But this market does seem to be following the playbook from 2008, albeit at an accelerated pace. As noted earlier, it took Congress 6 months to act in 2008 – about the length of time we saw the markets declines then. If markets stick to the playbook and Congress acts quickly as expected, we’d anticipate the volatility to decline. Much of this will depend upon how successful we are at containing the spread of the virus. In short, we think much of the damage has already been done with regard to asset prices. Stocks are approximately 32% off their earlier record highs. We seriously doubt (and you should too) that the 500 largest companies in this country have lost one third of their enterprise value in three weeks. We expect asset values will begin to recover when the data regarding infection rates crests and begins to fall. How quickly is anyone’s guess. But it’s worth noting that we went into this mess with a strong, growing economy and record low unemployment. We didn’t send a weak fighter into this ring. We think that will make all the difference on the other side during the recovery. And while we’re on that topic, remember: This is a temporary event. In 2008, no one was really sure where things would end. That was a structural financial crisis, with shoes dropping every day. We all know this will end and life will return to normal. Take some strength from that and stand fast.
Story time: in March of 2009, we were conducting retirement workshops for several large employers around the state. The Dow Jones had fallen from 14,700 to 6,500. (Let that sink in.) Large established companies like Lehman Brothers and Bear Sterns failed. Merrill Lynch had to be bailed out by Bank of America. In those workshops, we implored attendees to keep adding to their retirement plans, to put spare cash to work, to take advantage of this remarkable opportunity to scoop up assets at bargain basement prices. And to stand fast on their current allocations. Some thought we were crazy. Those that listened and trusted enjoyed a ten-year run that saw the S&P 500 rise 400%. Our message today is no different. We don’t know when this ends just yet. We don’t know how markets will respond over the coming weeks as this thing runs its course. But we do know it will end, and people will go back to work. Companies will recover. Markets will rise again. The world is always ending, but it just never ends. Things keep get better over time – just not in a straight line. This will be no different. The message remains the same.
Finally, Some Inspiration and Advice
Now, some advice to improve your outlook and your overall attitude. First, stop going down rabbit holes on the internet. Conspiracy theories, wild prognostications, and doomsayers have no place in your life. They are aimed at weak-minded people who are susceptible to such nonsense. You’re better than that. And turn off the news for a while. (What can you do about it anyway, except panic and go hoard toilet paper?) Go outside. Take a walk. Do some gardening. Get some exercise. Netflix and chill if you want. Read a book or two. We’re playing board games at our house – a lot. And I’m mostly losing. Remind yourself daily that life will return to normal soon enough. And look for inspiration in the stories you see. There really are good people everywhere, and it restores your faith in human nature to see them in times like this. Witness:
US researchers have administered the first vaccine to volunteers in an experimental test program. More trials are on the way.
Several currently approved drugs appear to help patients recover more quickly and are being tested on patients as I write this.
Hanes, the clothing manufacturer, has refitted their operation to produce hundreds of thousands of surgical masks.
Xiaomi, a Chinese technology company, is shipping crates of respirator masks to Italy – covered in Italian poetry. (“We are leaves of the same tree.”)
Distilleries all over America are churning out hand sanitizer. (It tastes terrible.)
People are picking up groceries for elderly neighbors.
I could go on, but you get the point. While our lives are temporarily disrupted, give thanks for what you have. And look to help someone less fortunate than you. And just breathe. It’ll all work out. It always does.
Don’t hesitate to call. We’re here for you.
Your First Coast Wealth Advisors Team
1 Wall Street Journal, 3/16