Over the past several weeks we have all personally experienced the response to the coronavirus. Store shelves have been bare, social interaction is being minimized causing schools to switch to virtual or remote learning and some businesses have been forced to close.
As many of you know, we are furiously monitoring data and information and participating in many conference calls and webinars to gain as much insight as possible on current events. I wanted to share some of our findings, as I believe the more information that you have available to you the easier it will be for you to make educated decisions about your current situation.
I will address the 2 major components of the current crisis, which are the virus itself and the economic, governmental and market reactions to the virus.
COVID-19:
There is now enough data from other countries to prove that the coronavirus IS NOT spreading exponentially. It is following Farr's Law of Epidemic—like other viruses. Farr's Law states that epidemics tend to rise and fall in a roughly symmetrical pattern that can be approximated by a normal bell-shaped curve.
- We know from China, Japan and South Korea that the peak in new cases is between 3-4 weeks of time.
- Even Italy is showing that there is a slowing of new cases, hence following the bell curve.
- Here in the United States, many regions are likely to follow their own bell curve. As we originally saw Washington state as the hot spot early on, New York is currently facing significant increases in positive tests.
Due to the fact that testing has increased, we have seen a rise in the number of confirmed positive cases. Many of these people likely had the virus previously but weren't tested at the onset of their contraction of the disease.
Testing is key to tracking the virus because the numbers will give us certainty about the trajectory of the virus and where we are on the bell curve. This information will help governments make decisions about reopening businesses.
The Economy:
Let's recap, we came into 2020 with very strong economic indicators.
- 273,000 new jobs added in both January and February across all business sizes (large, medium & small). It was broad based growth.
- Housing Starts—the construction industry— in December, January and February had its highest 3-month total and its highest 3-month average which hasn't been seen since 2007.
The upswing in the economy changed quickly after the government—national and state level—began to place restrictions on businesses. We are now seeing numbers that reflect that business production is off and unemployment numbers are rising. As of March 26th, new unemployment claims were nearly 3.3 million individuals. This number is both historic in its magnitude, while at the same time being completely expected.
The Government:
The Senate passed a bill that would provide close to $2 trillion in stimulus benefits spread through individuals as well as the business sector of our economy. As of this writing it is way too early to understand all the nuances of the bill that likely will be signed into law by the President, assuming the House approves it. These actions being taken by the government are designed to keep people employed and receiving income as we continue to fight the virus. Previously the Federal Reserve took multiple steps to help our economy by reducing interest rates and providing liquidity in the bond markets.
The Market:
Based on many experts' analysis, there likely was an over-reaction to the expected future reduction in corporate profits. When we look back at the 2008 financial crisis, which lasted 18 months, corporate profits declined less than 50%. If we were to use the corporate profit model to value the market, this week's stock market lows would equate to corporate profits for the full year being off as much as 60% - 80%. If businesses are shut for 3 months (roughly Mid-March, April, May and into June), it would be expected that their earnings would be off by less than 60-80%.
Final Thoughts:
Previously I shared a quote from one of the world's most successful investors, Warren Buffett. Today, I will share a quote from one of the most influential people in my life. My grandmother would say “This too shall pass” anytime our family had to deal with difficult situations.
Based on the steps the government has taken, it is reasonable to think that once restrictions on individuals and businesses are lifted our economy should be poised for a strong recovery. The exact timing of that recovery can't be known for certain; the virus is a key to determining that, however, we believe the stock markets will reflect the recovery well before the economy's numbers will.
Please take a moment to review the attached piece from American Funds titled “Keys to prevailing through stock market declines”.
As always, if you have any questions or concerns please feel free to reach out to any of us here at the office. The governor here in New Hampshire has just announced further restrictions on non-essential workers, however we can still be reached at our normal office number and emails. Stay safe!