As the world confronts the unprecedented threat of the coronavirus (COVID-19) outbreak, Marietta’s Economic & Financial Market Outlook must be completely overhauled. The difficulty in providing a useful and specific update is that these are uncharted waters with no equivalent historical references. Any current forecast contains assumptions that could be outdated in hours, as economic and medical data rapidly update and stimulus measures are announced. Amid this uncertainty, our focus is on the major questions that need to be addressed before markets stabilize:
- How much of the country will be affected by the virus, and how long before we start to see a decline in active cases?
- How restrictive will the national, state, and local policymakers be in shutting down the economy in the interests of public health? How successful will the restrictions be in containing the virus?
- How successful will the healthcare industry be in developing a vaccine and how long before the testing process permits distribution?
- How quickly and how successful will the national government be in countering the economic impact of their public health measures on citizens, small businesses, and corporations?
- What will be the impact on corporate profits and the threat of dividend cuts, bailouts, and bankruptcies?
- Will policymakers be able to deal with liquidity problems in financial markets?
The task of investors is not to press forward with rigid statistical predictions regarding GDP and the S&P 500 Index. In other words, this is a time to avoid being locked into an inflexible strategy. Rather, investors must accept that there is an abnormally large range of possible outcomes and they should monitor closely developments and the changing probability of various scenarios.
Despite the cloud of uncertainty, we offer several observations…
The news is likely to get worse before it gets better. However, at some point the panic will subside. For a stock market recovery to begin, investors need more certainty on two fronts:
- that COVID-19 won’t overwhelm the US healthcare system.
- that economic fallout will not spiral into a deep, long-lasting recession.
We think the recovery will begin well before the virus is eradicated. The country has mobilized to fight a war against COVID-19. In this vein, stock markets will rise when we see a turn of fortune and start winning the war. Fortunately, there is a roadmap to stopping the acceleration of new cases and relieving pressure on the healthcare system. The strategy is twofold: mass testing and physical isolation. This has worked in other countries that have passed the worst of the spread of new cases. There is a downside, however: isolation causes a severe decline in economic activity. Policymakers have made the rare decision to sacrifice economic growth in order to protect the public health. Short-term volatility in financial markets will occur due to the efficacy of policies aimed at lowering the strain on the healthcare system, both to the upside and the downside.
The immediate financial impact of mass isolation is drastic. For a recovery to begin, investors need assurance that these short-term economic consequences do not balloon to become a more pronounced structural decline. Federal Reserve action has been a good start but will not be enough. To stem the tide of this calamity, fiscal stimulus must occur on two levels: individuals need money to live and businesses need access to capital to survive. The US consumer has been the beating heart of the global economy. Yet a recent survey revealed that 69% of Americans have less than $1,000 in savings and 45% of Americans have no savings at all. People living paycheck to paycheck need relief, as they cannot work due to mass closures and thus are not receiving paychecks. In addition, small businesses have shuttered their doors, yet still have bills to pay. With no customers, they need access to capital to survive. A large fiscal package targeted at small businesses and individual families would go a long way to help people get through this difficult situation and would give investors confidence that the economy will avoid a huge spike in unemployment, bankruptcies, and other disastrous impacts of recession.
We, as a country, will overcome the threat of COVID-19 and get back on our collective feet. Investors should keep in mind their time horizon, as long-term returns have been very positive following past selloffs of this magnitude. Portfolios should be monitored carefully to ensure that they will continue to meet income needs and capital preservation goals. Proactive investors should consider taking steps to position the portfolio for a post-corona world while avoiding those industries likely to exhibit lingering problems due to the global response. Stay calm and stay healthy friends.