by futurist Richard Worzel, C.F.A.
The Covid-19 coronavirus is bad news for everyone, and in many different ways. The biggest, and most important way is that it will kill people, potentially millions of people. How many it will kill is as yet unknowable as we don’t yet know how contagious it is, and how many people who get it will die. I’ve tried doing back-of-the-envelope calculations based on the number of cases and number of deaths reported, and the numbers could be truly scary. Since I have no expertise in epidemiology, I won’t offer my calculations.
Where I do have some experience and expertise, because of my training in finance and investing, plus years of watching economic cycles, is in how the coronavirus outbreak is likely to affect the financial markets and national and global economies. And that’s not encouraging, either.
Financial markets and economies fundamentally run on confidence. When consumers are confident about the future, they are comfortable about buying things and investing in markets. When business leaders are confident about the outlook, they invest in productive capacity, hire workers, and build up inventory. When financial markets are confident about the outlook for stocks or other investment vehicles, they are willing to pay more to own them.
The reverse is true as well.
If consumers become concerned about their future, they will postpone the acquisition of everything from cars to clothes to children. As they do that, retailers suddenly find their sales are weaker than they expected, which means their inventories are higher than they would like, so they cut back on the orders to their suppliers, and cancel new hires, or perhaps even lay off workers.
As suppliers find their orders are lower, they, in turn, try to rebalance their inventories by cutting orders to theirsuppliers. This leads to a domino effect, with companies cutting back and laying off, which means consumers have less to spend and are less confident of future earnings. This leads to more reductions in consumer spending, which leads to fewer orders, which leads to a declining workforce, which leads to further declines in consumer confidence.
It’s vicious cycle that can produce a downward spiral, and it all hinges on confidence.
Likewise, financial markets, which until very recently have been buoyant, greedy, and enthusiastic, suddenly find that the economy, which markets had assumed would stay strong, is no longer as strong as expected, which means that market valuations are too optimistic. As a result, markets have sold off.
The sell-off from February 20ththrough 28th, which was the biggest since the market crisis of 2008, has rattled investor confidence. As a result, investors will try to take some of their profits off the table by selling some of their holdings. This pushes markets further down, which erodes confidence further – and, again, you get a vicious cycle that can spiral downwards out of control.
And there are feedback loops both ways between the economy and the financial markets. Declining demand and employment income in the economy reduce financial projections for corporate earnings, which reduces the future value of stock holdings, which puts further downward pressure on stocks. And declining market values cause investors to feel poorer than they did when their portfolios were riding high, which can cause them to further cut back on consumer purchases, further eroding economic performance.
Which brings us to the effects of the coronavirus.
Covid-19 and the Economy
If the Covid-19 virus becomes a pandemic that persists for months, then it will precipitate an economic recession. But unlike a traditional recession, this recession can’t be cured with traditional fiscal and monetary policy. Dropping interest rates or increasing government spending won’t increase output in an economy where lots of workers stay home, where consumers don’t shop, and where exports don’t ship.
In fact, the most effective things that any government can do to deal with such a recession is to be as aggressive as possible with public health. This means conveying lots of solid, useful, scientifically-based information to the general public about what they can do to keep themselves, their families, and their communities safe. It means making sure, in particular, that health workers are given the best possible protection, as well as the tools they need to treat patients in their care. It means supporting medical and research efforts into the best treatments, and funding research for a vaccine. And it means coordinating efforts with other governments at all levels, and all around the world to contain the spread, and deal with the consequences of the disease.
In terms of keeping the economy functioning, telework will become important, as will organizational flexibility in helping parents deal with children who stay home from school, and shoppers who can order online – but may not be able to depend on having things delivered to their homes because of a lack of delivery people.
New techniques will have to be invented to help overcome the problems of an economy where people cannot meet, or where lots of people are absence due to sickness or quarantine – and enormous profits will be up for grabs for those who can invent new techniques for enabling such techniques.
But isolating people to prevent transmission will become a major problem, not only in terms of the health of the economy, but also because making sure people can get enough food and other necessities during a period of general quarantine may become a major logistical problem.
And if Covid-19 becomes a pandemic with major health consequences, as it seems it might, then nothing governments can do about their economies will matter until it is once again safe for people to congregate in large numbers. Once that happens, then and only then will traditional efforts to lift an economy out of recession become important. Until then, they will be largely irrelevant.
Coronavirus and Stock Market Uncertainty
This coronavirus is new, and we know little about it, even though China has been battling it for more than a month. One commentator said it might compare to the Spanish flu pandemic of 1918-20, which infected about 27% of global population, and killed at least 40 million people.[1]In particular, the lethality rate of the Spanish flu was about 2 ½%, which seems to be only slightly higher than early estimates of the lethality of the Covid-19. What iscertain is that Covid-19 is highly contagious, which means it willspread far and wide.
We do not know it will be as bad as Spanish flu, but uncertainty scares the stock market more than just bad news. The market can discount bad news, take the hit, adjust prices, then move on. But uncertainty is a bottomless pit; no one knows how bad things can get.
Stocks won’t go straight down. They never do, just as they never go straight up in a bull market. But recoveries will be weaker than declines, and peaks will be successively lower and lower as lack of confidence eats away at investors.
Eventually, uncertainty will give way to greater certainty as we learn more about this virus. But in the meantime, uncertainty rules, and stocks will fall.
What Should You Do Now?
Right now, the critical questions are: How long will this last? And how far is down? And that’s where the uncertainty created by the coronavirus becomes particularly difficult.
We don’t yet know how bad Covid-19 might be, or how long it might last. We do know it won’t miraculously vanish, it isn’t a hoax, and it isn’t some kind of politically-inspired plot.
So the first, and most important, thing is to keep yourself and your family as safe as possible. Keep track of what’s happening in your area with this virus, and pay attention to any notices from medical experts and health department professionals – meaning physicians and epidemiologists who understand the science and medicine. Pay attention to any recommendations about how to stay safe.
One piece of advice is universal: wash your hands frequently, and especially every time you come home from somewhere else.
As for the stock market, there are a number of things to keep in mind. First, crises, even end-of-the-world crises, are regular events in investment markets. They last for a time, and then they pass. The key is not to panic and take action based purely on emotion. But you do need to think clearly, and to act decisively.
First, don’t get trapped into holding stocks all the way down through a bear market by refusing to sell just because stocks have backed off from their highs and you didn’t sell at the peak. Today’s disappointing lower prices may look pretty good a year from now – or even a month or a week from now.
Keep in mind your personal time horizon. If you’re investing for 10 or 20 years from now, what happens today will be less important than if you’re planning to cash out in the next 2-3 years. If your planning horizon is closer than, say, 5 years, then you should be moving to conservative investments in any case, so don’t try to wait out a bad market.
If you have speculative investments that are riskier, and that you were hoping would hit big for you, you’re probably better off selling them immediately. If you have solid, blue chip investments that you were planning to keep for a long time, you can probably hold onto them. Good companies typically pick up market share during bad times from more poorly managed companies.
But don’t make the mistake of thinking the world will go back to the way it was a month ago. The world has changed, the economy has changed, and the investment markets are different than they were even a couple of weeks ago.
And be aware that many current investment professionals are too young to ever have experienced anything like this. Their natural tendency will tell you not to worry, to hold onto your investments, and wait for the market to zoom up again. Such comments are commonplace at the beginning of a bear market, and are neither well informed, nor helpful. Find someone who has experience in these kinds of market situations, and knows what kinds of actions – or inactions – are appropriate for you.
Finally, let me close with two stock market clichés, and note that they are clichés for a reason.
First, bull markets are dominated by greed. Bear markets are dominated by fear. Which emotion do you think dominates right now? That should tell you where we are in the cycle.
And the second cliché is: Never try to catch a falling knife.
© Copyright, Richard Worzel, March 2020.
