In the matter of 15 days, the global economy completely shut down and entire nations went on lockdown. The stock market has declined more than 30% in the last month, wiping out trillions of dollars of wealth, and we haven’t had an economic release of any significance. The U.S. economy was never meant to be shut down for a day, let alone a month, and we are going to see if we can restart the engine and get back to business shortly. If you are investing with money that you may never need, that’s one thing. But, if you are investing with money you may need in two, three or even ten years, you may want to consider rearranging your portfolio to take some risk off the table.
Investing involves risk and evaluating risk requires the ability to quantify a likely range of outcomes. Today, the ability to quantify value is far more difficult than it was even a month ago because the range of likely outcomes has expanded exponentially. In a normal environment, a revenue forecast might have a lower band of 2% and an upper band of 4%. In today’s market, that range has expanded to include the possibility of bankruptcy and going back to a normalized environment. This is the basis for the market volatility we are witnessing, and only time will tell which forecast is right.
A miracle drug might end the COVID-19 pandemic tomorrow but sending people back to work early may provide fuel for the virus, creating another shutdown. You also must consider the fact that the government has nothing more in its tool kit after the $2 trillion bailout. Maybe that’s enough to solve the problem, as the stock market has welcomed this news and is up 15% in just a few days. Keep in mind, though, that assistance from Washington may help ease the pain for millions of Americans but doesn’t kill the virus or remove the fear.
Over the next several months, we will all likely witness some of the worst economic numbers our country has ever published. Thirty-seven million jobs are at risk and we are about to witness the unemployment rate skyrocket and consumer confidence collapse. Goldman Sachs’ latest report predicts global GDP to decline by 24% in the second quarter and Morgan Stanley expects it to decline by 30%. President of the Federal Reserve Bank of St. Louis James Bullard also says that growth may drop 50% and unemployment may hit 30%.
At this point, the government is trying to balance the risk between total economic annihilation and the public health impact of letting the virus run a little more freely. The steps taken to date are simply to slow the current rate of infection and prepare the healthcare system for what is coming down the path. The government’s strategy involves letting people return to work in April with the full knowledge that this tactic will cause the virus to continue to spread. Their intention is to match the rate of spread of the virus with the capacity of our healthcare system, which is the definition of flattening of the curve that we’ve all read about. The healthcare system’s capacity is limited by beds, physicians, and equipment, leaving hospitals all over the country scrambling to increase capacity while companies like GM, Ford and 3M are scaling up to build new respirators.
Social distancing will be the new norm but the elderly and those most at risk will need to continue to self-quarantine until there is a cure. There are more than 50 million people in the U.S. over the age of 65 and we have no idea what the long-term impact is of taking these people out of the physical economy, and if they will even comply. We should all be prepared for a potential roller coaster ride ahead as cases of the virus ebb and flow. The Spanish Flu of 1918 came back three times before it finally subsided.
No one alive today has ever witnessed what we are going through and taking to the investing sidelines until the pandemic is solved may be the best course of action. Whatever it is you decide to do, we urge you to tread cautiously in these times because they are anything but certain. Staying the course works for some but not all. We will get through this and we know America is resilient. There is light at the end of the tunnel, but the question is, how long is the tunnel?