Broker Check

Coronavirus and the Global Economy: An Update from Egan, Berger & Weiner

March 17, 2020

Uncertainty is scary. And today we are certainly living in uncertain times. It’s understandable that watching markets and account values decline with no known end is causing considerable pain. You worked hard for your nest egg and naturally you’re scared of losing it. Knowing that we’ve seen similar severe market downturns and have not only survived but thrived afterwards may help some people come to terms with recent market events. Others will find no consolation in statistics or charts of past event-driven declines. This one is more serious, because it’s happening now. Pain is more acute when it’s happening, and memories of pain usually subside with time.

Rather than dwelling on the unknowns, perhaps we can find a sliver of comfort in what we do know. First, this is not the 2008 global financial crisis. 2008’s crisis was brought on by underlying factors within the financial system itself; banks and financial institutions had weak balance sheets and the virus of the time, bad loans, were spread far and wide. Today, the financial system is stable, and banks are well capitalized and in a much better place to be a part of the solution rather than the nexus of the problem.

We also know that in February, the US consumer was in a very good place. US household net worth had never been higher and consumer debt ratios hadn’t been this low since the 70’s. The University of Michigan’s Index of Consumer Confidence logged its second highest reading since the 2008 financial crisis. Absent this outbreak we would all still be spending, and it’s likely we will spend again as soon as the coast is clear.

Prior to the coronavirus outbreak, most economists expected an improvement in global economic growth. As 2019’s policy uncertainties gave way, global trade looked certain to accelerate

Russia and Saudi Arabia got into a spat over oil prices and, as a result, Saudi Arabia is flooding the market with oil. As oil prices plummet, so are the stock prices of oil producing companies. This will have adverse impacts on oil producers and likely the institutions that have loaned them money. Falling oil prices may also help many consumers, as far more of us buy petroleum products than create them.

The government is engaged in stabilizing the economy. Much of how the economy reacts from here on out will depend on the effectiveness of global government actions. The preferred lever of interest rates has reached its limits and the time has come for elected officials to put aside their differences and enact fiscal stimulus to keep the gears of commerce moving. Households will need support while work is lost due to shutdowns or school closures. Companies, both large and small, will need help with temporary cash flow shortages. Quickly implementing measures to inject cash into stressed balances sheets will be critical. This could be accomplished via disaster relief agencies already in place.

We know that recoveries from past event-driven crises typically depend on the health of the economy just prior to the event. Historically, if the economy is strong, the recovery is quick.  The US economy was in decent shape prior this outbreak.

We know that since 1928, 67% of years have seen positive returns for the S&P 500.

We know that the industries most at risk from policies enacted to combat the novel coronavirus account for a relatively small part of payrolls, earnings and consumption. See graph.  The impact on these businesses and their employees may unfortunately be substantial, but the effect on the macroeconomy should be less.

Lastly, I know that human beings are tremendously resilient. Time and again we have overcome obstacles that in the moment appeared insurmountable. The speed of technology and unyielding human ingenuity will combine to create solutions for today’s problems, just as it did for yesterday’s problems.

I can’t tell you when this will all be over. I suspect once the knowns are greater than the unknowns, confidence will return. Perhaps that comes with greater access to virus testing. Perhaps that comes when Congress steps up with solid measures to support the economy. Until then, we have to focus on our plans. Long-term investors have time to weather the current storm and recover when the clouds clear. Shorter-term investors likely have assets in their portfolios that have held their own during the crisis and won’t be forced to sell at today’s depressed prices. We’ll get through this together because if there’s one thing that brings Americans together it’s our response to disasters and threats. I already see neighbors helping neighbors and many folks going out of their way to ensure local businesses and restaurants continue to have income. If you find that current events are causing you stress and anxiety, perhaps you’ll find the tips in this great NPR article helpful. Wishing you continued good health, and please reach out to us if you have any questions or would like to review your plan. As always, we appreciate your trust and confidence.