As China has demonstrated, it is possible to quarantine a large portion of the population to halt the spread of the coronavirus. If quarantine cannot stop the virus from spreading in the US, it will at least flatten the spread of the virus so our medical infrastructure will not be overwhelmed. These actions are crucial to save lives; however, they are strangling the world economy as people stop spending on everything not crucial to dealing with a quarantine.
China was the first country impacted by the coronavirus in November 2019. China implemented a quarantine starting January 23rd. The positive impact of the quarantine can be seen in drop in new cases. I suspect the US could see a similar outcome; however, let’s see how we handle our freedoms being taken away. This is almost a social experiment.
*Data compiled from Worldometer.info
Economic growth will definitely be impacted by the quarantine. This impact is causing investors to fear a repeat of the financial crisis of 2007-2009 as companies and people cannot service their debt payments. This fear has caused the major indexes to sell off significantly (Figure 1).
Fortunately, our banks are in the strongest financial position in recent history. All 18 banks that are subject to the stress test exceeded the minimum capital and leverage ratios. A few smaller regional banks that are over exposed to the oil sector may go under; however, this will not cause a financial crisis. Banks will work out loan repayment with industries and companies that are most impacted. The government will also create special programs and incentives to help the impacted as well.
Is this going to cause a recession? Recessions are defined as two negative quarters of GDP growth. First quarter GDP may be OK as there was a surge in spending by people preparing for the quarantine. The second quarter GDP will likely drop significantly; however, if we have decent news regarding the virus’s spread, fourth quarter GDP numbers could be good due to pent up demand. Time will tell how this all plays out and not panicking is the most important thing we can do.
Actions
It is always upsetting to see assets that you have worked a lifetime for go down in value. How you react to this situation depends on your specific circumstance. Are you retired? Are you about to retire? Do you need emergency cash?
· Draws: Retirees rely on their investments to cover their day to day expenses. Our clients have enough cash to handle a few months of draw. If this downturn lasts longer than expected; we will rebalance your accounts by liquidating bond funds that haven’t been as impacted with the selloff. We want to protect the allocation to stocks as they will see better days in the future.
· Pensions: It may be a good idea to claim your lumpsum draw from your pension so that it can be invested into a balanced portfolio that could benefit from a rebounding market.
· Home Refinance: Mortgage rates are hitting all-time lows as the Federal Reserve Bank (Fed) cut the federal funds rate to 0-.25 percent. This has indirectly caused the 30-year mortgage rate to drop from 4.31% (last year) to 3.29%. This will save homeowners $700/year for every $100K they borrow.
· Cash: If you have built up a cash savings and have a long-term outlook, it may be a good idea to start investing the money.
The market selloff is extremely stressful. Please reach out to me if you have any questions or concerns. We will work on a plan together to address your personal needs.