Please note: the following are my own beliefs and thoughts. They are not attributed to any employer, organization, or person. They are my own.
The global economy is in limbo, and that trickles down to you and me. Experts are in agreement that we are still only at the beginning of an ugly downturn. Just over 30 days ago, we were at market highs with a tight labor market and just two weeks ago, record unemployment. As of this writing, we are 30% below market high, have 281,000 unemployment claims that were made in the last five days alone (a 33% increase from the prior week), and simply an unclear outlook.
In my opinion, the turbulence of the stock, bond, and alternative markets can be attributed to three things:
1) We are not prepared to face this pandemic. This is an apolitical reality.
2) We do not understand enough about this virus.
3) We are not sure what the long-term damage is to local, national, and global economies.
Connecting COVID-19 to the Economy
The pandemic is shutting down entire industries. No one can travel, go to bars, or patron businesses. Weddings and huge events are being shut down. It’s not just Taylor Swift who suffers when her concert is shut down. All of the vendors no longer have an opportunity to sell merchandise or food and beverage, the venue can’t sell seats at a certain price, all of the hourly employees and security detail miss a paycheck from the cancelled event, the parking companies miss revenue from their ramps and meters, local restaurants/bars and shops don’t have the heightened foot traffic an event would bring.
Due to a lack of oversight and planning by the US Government, the spread of the virus will get worse, and the death toll will rise. The US Government is unprepared to respond quickly: they don’t have enough staff, appropriate medications, hospitals, face masks, sanitation, or enough physical space to contain and care for those infected. The markets recognized that we are woefully unprepared.
The pandemic will halt market growth and hurt us for years. We can talk about what went wrong, and I know we will in the weeks and years to come. We know the market blames the US Government and their response, rightfully so. We also know that the private sector, and large businesses, are also to blame. Pointing fingers to explain how we got here does not change that we have to respond to the situation we face. In this post, I include some of the doom and gloom you’ve likely already heard, and I present some financial action steps that some will hopefully find helpful as we all try to get through this together (separately).
Making Sense of The Economy
All signs point to the United States entering into a recession, or a decline in trading and industrial activity. There is less spending and therefore less economic activity. One note of definition: the economy and the markets are different but woven together. The economy influences all of the markets, but the markets are more of a measure of how the economy is doing or a reflection of where the economy is going. The three main markets I talk about are stock, bond, and alternative, and each will respond a bit differently in a recession.
Our stock market is comprised of publicly traded companies, with corporations as large as Amazon or as small as a bank in Fauquier County, VA. The stock market is often labeled as either in a “bull” market or a “bear” market. A bull market means the stock market are going up; a bear market means the stock market is decreasing by at least 20%. Due to COVID-19, we have entered a bear market.
Our bond market is made of mostly of government, municipality, and corporate debt securities. During a recession, the bond market will have an influx of investors. Without getting too wordy, bonds provide more comfort to investors who want to have the money grow without the ups and downs experienced in the stock market, which is why bonds will have an influx of investors during a down turn. Keep in mind, though, that NOT ALL bonds are safe, and not all are guaranteed.
Our alternative market is comprised mostly of hedge funds, private equity, and real estate investment trusts. The alternative market will hurt badly in this economic cycle. The companies who manage these funds are often over leveraged, with little cash to support any sort of downturn. Some of these funds are also illiquid, meaning they have low or no options to cash out. We are talking about billions of dollars in losses. This does not really hurt most everyday Americans retirement accounts, but this will hurt businesses, and halt companies’ access to cash-heavy investors.
With a recession, there will be a lot of ups and downs in our economy across every sector and industry, with huge shocks to supply and demand. Our economy will shrink dramatically. When our economy shrinks, we need to be prepared for what could happen. The stock, bond, and alternative markets are telling us that now. We are seeing that the economy will suffer throughout this calendar year. The recent tariffs had already burdened farms, manufacturers, and large and small businesses, ending long term partnerships in many cases. Now add a global lockdown caused by a virus, a lack of production, and companies becoming insolvent, and the market will start to drop further. We don’t know the extent of the damage that will happen as a result of this virus, we just know it will not be good.
What to Expect
Businesses will close. Companies will lose decades-old manufacturing partnerships. Farms will be forced to sell. Employees will be laid off. Small businesses will be impacted greatly. Teachers will be forced to innovate with no budgets (not that they had one to begin with). The “gig” economy, comprised of contract workers, consultants, photographers, etc., will tank for a period of time.
I predict we will likely be in a recession for 11-18 months. In my view, we will not start seeing growth until around Christmas of this year. Must of the numbers I see show a rough end to Q1, a dramatic drop being between +.4 or -4%. Q2 will be horrendous, I think the drop will be closer to -15% in our economy, but should note that Goldman Sachs is predicting an even more dramatic -24% drop. Q3 and Q4 will be hard to predict, but I do not expect massive growth. I am hopefully that we will return, and we will be stronger than before.
I predict we will see roughly a 45-60% drop in the stock market. We are already around 30%, but remember that we are just at the start of this downturn, and spread of this virus. My personal view is that the Dow Jones will likely dip to 14000-15000. Some estimates have it as high as 17000, others as low as 10000. A lot of this will depend on the government’s response.
Energy will be dirt cheap, and those companies (mostly oil and gas) will become insolvent. They have too much debt, which is due very soon. These energy companies make up most of the high yield debt/bond market, but they won’t have the capital to pay their obligations especially with Russia and Saudi Arabia driving down prices and making US energy companies tank.
I predict the real estate market will dip, but not to the extremes of 2008. Home prices will fall, and commercial real estate will likely dip although not dramatically. Sales and purchases across the board will slow down.
Non-profits, and donor driven organizations, will also see huge dips in funding. There might still be some access to grants, but non-profits thrive mostly due to donors. Those wells will dry up. I can’t predict how many non-profits will close, but I know that it will end poorly. Churches, shelters, food shelfs, universities, and other program based non-profits will likely see drops in their donations as a result have to close their doors. It will mirror the market. Non-profits don't get bail-outs.
The “gig” economy will hurt badly. And I mean badly. Those who make money running their own company such as photography, consulting, training, contract, cleaners, construction, etc. need to start planning roughly 60-100% loss of revenue. Meet with an advisor, and embrace that it will be the toughest year on record for you.
Hospitality, service, and entertainment industries will take a massive blow. Not just cruises, but karaoke bars. Not just franchises, but new restaurants. Not just airlines, but tour guides. Many times these companies are over-leveraged and carry too much debt to make it through a recession. Escape rooms will not have a place in this economy for some time. Bank of America and Goldman Sachs estimate a 30%-95% drop in revenue over the next three to four quarters for this sector.
I expect unemployment to be 12-15%. The US government is expecting it to get as high as 20%. Most analysts I have read indicate 20% is a high estimate, but still plausible. It may not feel like that now, but the day is coming where lay offs, furloughs, and more will occur. It will be ugly. The government will need to intervene. I hope they bail out citizens followed by businesses while expanding benefits for unemployment, children, teachers, and essential services.
Investing
Investing is very personal; it involves your money. Not everyone can or should invest. There are MANY in our society who do not have the income or means to do so. This economy tends to hurt this group even if we aren’t in a recession. That is a shame, and will be touched on at a later time.
In this season, investing does not have to be put on hold, but it does need to be strategic and founded on patience. I believe the opportunities right now are mostly in the bond market, not in the equities (or stock investments) and alternatives. If you have time, aren’t hoping for a large return, have a tax strategy in mind, and just need a place to preserve cash, the opportunities in the bond market might make sense for you. Mostly though, I encourage patience. The bond market is not perfect, and there are huge problems on the corporate, mortgage backed, and municipal debt side, with a large lack of liquidity.
Opportunities for equities and alternatives will eventually come down the road. Before coronavirus, prices all across the market were incredibly high because of a great economy, solid jobs, and stock buybacks (which you can argue is why businesses are now in a bad spot, but that is for a later post). A correction was bound to occur, just not one of this magnitude and speed. I personally have been pulling out of equities for some time now, and even more so since the pandemic began to take shape in December.
Most retirement strategies are diverse and include bonds and equities. Those who are in retirement or about to enter retirement should check in on your portfolio and speak with an advisor. You may need some quick coaching on how to navigate these next steps. If you are 10 years or more away from retirement, you should recover just fine.
So, should you invest money today? The answer is maybe. I can’t speak to where you are. I don’t love to give advice on what to invest in, but I am personally exercising patience and not investing in equities right now. I believe the best philosophy is value investing: you always want to buy low, sell high. We are not yet at the “low.” It is amazing how hard this is to practice. I bought Apple, Netflix, Delta, and JP Morgan during a dip a few years back. I sold all of them recently, when they were higher. In between, there was some volatility. I showed losses some weeks. I stuck to my plan, and it paid off. The season to come will be great for value investors.
What You Can Do Now
Making changes now will be critical and likely hard. To weather this recession, you should take action as soon as possible, and I have a few steps everyone should take:
1) Create a budget and tier expense items as essential(diapers, food, shelter,) then desired but not vital(name brands,) then unnecessary (eating out). Cut unnecessary expenses immediately, and lower the desired but not vital ones. When you tier expenses, you can cut out all non-essentials., and save a lot of money. This is key for small businesses and the “gig” economy. If you run your own company, start cutting expenses. Finances will likely get very tight. If you do anything, do this. You need to cut expenses. I can’t stress this enough. Cut expenses.
2) Save what you can and where you can. It will stink. You will lose some of your livelihood. You need to start cushioning.
3) Don’t make purchases that will push you into (or further into) debt if you can avoid it. If you have to buy a car, go as cheaply as you can stand. If you plan to refinance your house, speak to a mortgage broker, not a bank. Brokers have access to a much larger swath of mortgage rates and options.
4) Be generous. If you have the resources to provide support to small businesses, gig economies, and others, do so. The vulnerable and exploited in our society need you as well. It may not be financial, but may be a meal or space in your home. If you can, be as generous as possible.
5) Not everyone needs to do this, but I would argue a majority do: talk to a financial advisor. Talk to someone who can answer your questions. Do not just leave your finances to chance.
Lastly, take this virus seriously. I have heard and read in my places that if we do not take this seriously, we could cycle back to the same place we are in now- quarantined, mad rushes at the store, huge dips in our markets, and prolonged suffering for vulnerable communities. If you want this to end, follow the CDC guidelines. This is how our economy can recover. This is not the end of our world, but life will look different for a while.
I am hoping to write again on three other subjects: what this means for the most vulnerable and exploited in our society, how companies should rebuild around employees rather than shareholders, and an explanation of how the government responded.
Resources
I trust CNBC, SeekingAlpha, Bloomberg, Kiplinger, Barrons, Financial Times, Wall Street Journal, Rosenberg Research, and PBS. Trust me, there are A LOT of great resources out there. There are a lot of other one of articles that are great as well. Here are some good articles I have found:
Why can't we just freeze everything for small businesses and the service industry? Obviously we don't want all restaurants to go bankrupt. It seems like it would cost way more, culturally and money wise, to have to open all new restaurants after this is over. Can't commercial real estate owners defer or lower rents so that it's easier for businesses to stay open? It just seems like rent shouldn't be as high, across the board, during this time.
ReplyDeleteI think these are great questions! We could freeze everything, but it does not address the underlying problem- the future. We can blunt their decline, but freezing will need to account for growth. Companies will lose patrons, sponsors, and decades of partnerships!
DeleteIn regards to real estate, deferring, cancelling, or lowering, could also harm that industry. These companies are often over leveraged, have a ton in debt, with a lot of obligations! Prices have been so high for so long, which means obligations are as well. There will need to be an intervention, and I think the Fed is going to do so!