I know we have been communicating a lot with everyone lately, but at times like these we believe that there is no such thing as too much communication. We know information is coming at our clients, friends and relatives from all directions – and not all of it is helpful. That is why I want to pass along information to help, not add to your wall of worry.
What we see right now is plain for anyone even mildly interested in the markets: The economy is going to slow drastically in the 2nd quarter. Schools and churches have closed, meaning that much needed education and guidance is now being provided online, at least temporarily. Businesses have limited visitors, some instructing employees to work from home, and many have even closed their doors – temporarily. The Coronavirus is going to spread and the number of people who have it will grow – temporarily. It is the length of this “temporarily” that has everyone worried. We all know that this will pass, but we don’t know when or how bad it will be before it gets better.
Weather forecasters, economists, or epidemiologists make models, and those models have varying assumptions and outcomes. We are typically informed of, and quite often act on, the worst-case scenario. How many times have we been told that we were going to get 8 inches of snow (a lot for Georgia), only to receive a dusting? We’ve often seen a predicted category-5 hurricane that came to shore as a category-2. And, of course, there are stock markets that are supposed to produce a 6% return that finish over 30% (2019).
Yet we can also remember those instances where the opposite proved true. WHY? Because these are only models and the best guesses of the experts. I am not saying the models are not helpful, and you should heed the warnings. I can tell you that if the weatherman predicts snow, someone in my house will be in line at Kroger for milk, bread and eggs for some weird casserole. Apparently, the coronavirus means we all need toilet paper! It’s absurd and we all know it, but we wouldn’t risk the health of our loved ones, and we will prepare for the worst. Our government is doing that as well, preparing for the worst and asking for our help. They cannot look like they aren’t doing or trying hard enough. I say let us give them support and help each other. Restrict travel and avoid large gatherings. It will only be “temporarily” if we all work together.
In the meantime, I’d suggest all of us do a little research and think for ourselves. Check out the CDC and past pandemics. Don’t just have the worst-case information fed to you. You can learn more by reading the CDC’s pandemic resources.
Hopefully by now, I have engaged the rational side of your brain. Now, let me dump some data on you. If you visit the CDC site, you’ll see that the last Pandemic (H2N2 Virus) that led to a US recession was in 1957-1958. That outbreak produced a staggering 116,000 deaths in the U.S. alone. The markets plunged, but, as the number of cases leveled out, the economy rebounded sharply. In 1957, the S&P 500 was down 10.78% for the year, only to rebound 43.36% in 1958. Our healthcare system now is much better than it was then, and, by the time the 2009 H1N1 Pandemic hit, the U.S. recorded 12,469 deaths. Sadly, even though that was just over 10 years ago, most of us don’t remember this event. This time around, it appears we are taking drastic measures as mentioned above.
I am not an economist, but on your behalf, I read and listen to as many economic experts as possible. Their consensus is that the markets will continue to be volatile until we complete more tests and attain certainty around the spread of this novel virus – one that has never before been seen in man. However, markets tend to turn before events are actually finished, typically changing course once some degree of certainty is known. Right now, the markets have priced in a 50% to 80% decline in corporate profits. To put that into perspective, during the Great Recession of 2008-2009, profits dropped 43% over that 18-month period. I believe in the short-run, 2-3 months, our economy will experience a severe drop in profits – but will recover later in the year. I believe we could see a drop in GDP for the 2nd quarter, as much as 10%, but I fully expect a “V” shaped recovery (sharp drop down with a sharp recovery up) in the market to start in the 3rd quarter and accelerate in the 4th quarter and into 2021.
All that in consideration, my advice remains: Have a solid financial plan and investment portfolio aligned to that plan and be disciplined. Don’t worry about which direction the next 20% move will take but which direction the next 100% move will take. Remember, that direction has always been upward over time.
Be Patient, Be Disciplined and, please, Be Healthy,
Shane Gaddy, CFP®, C(k)P®
Managing Partner-Financial Planner
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.