Coronavirus (Covid-19) and the Economy
Restrictive social distancing measures have been introduced across the United States and I wanted to give you my perspective of the Coronavirus (COVID-19) and the stock market. Note: I am not an infectious disease expert and past performance is no guarantee of future performance.
The United States and countries around the world have introduced restrictive measures on social distancing including drastic travel reductions, group gathering restrictions and shutting down restaurant and bars. The goal is to “flattening the curve” of Coronavirus spread to save lives and have better health outcomes until a Coronavirus vaccine is available, likely in 12 to 18 months. Companies in the US and other countries have government supported Manhattan Project-like activity to find a vaccine. China and South Korea have shown that restrictive social gathering measures have reduced cases of the virus after 2 to 3 months and some economic activity is resuming. However, some infectious diseases modeling indicates that “flattening the curve” for three months may not be enough and it could go on for 12 to 18 months in one form or another.
The economic impact of dramatically reducing the travel, restaurant, sports industries and most group events on the economy during this period is devastating. However, it is now being mitigated by government intervention and tremendous hiring in stretched industries. Amazon announced today it is hiring 100,000 workers and raising its lower wage workers by $2 an hour. I expect massive hiring in healthcare, food distribution, cloud computing, intranet infrastructure and cloud-based software. World governments, including the US, are lowering interest rates and providing massive government programs to soften the impact. I believe the long-term health of the economy, including supply chains and the travel industry, will return to normal, although the timing is uncertain.
The efficient market hypothesis (EMH) or theory states that share prices reflect all information. Stock prices have declined this year because of new negative information. First, we learned that we have a Coronavirus in China and that supply chain problems would begin as China introduced strict measures to lessen the virus. Now we realize the virus is in most countries and restrictive measures on social distancing are needed everywhere to flatten the curve and reduce the virus spread.
What could occur to make stock market prices increase from the current bear market? I believe four things can increase stock prices. First, the market needs to see a decrease in virus cases in U.S. and Europe. This has this taken 2 to 3 months in China and South Korea. Second, the market needs to see hiring in sectors like food delivery and hosted software off-set some of the losses in restaurants and travel. Third, Federal Reserve programs and government intervention needs to help workers and industries affected by their near-term shut down. Finally, commercial introduction of a Coronavirus vaccine and a return to normal business activity may have the greatest impact. We cannot accurately predict how quickly or slowly these events and the market’s potential positive reaction will occur.
I believe the best thing we can do with your portfolio is to maintain your target allocation and rebalance annually or more often when we deviate from your target. Since we first started tracking it in 1929, the stock market and economy has recovered from every prior bear market. Timing the market is futile: The best and worst trading days usually happen close together. The average annual returns following all bear markets (including the great depression) are 14.1%, 11.58% and 11.76% for the subsequent one, three and five years. The following is a link to US Equity Returns Following Past Downturns since 1926, summarized by Nobel Prize winners Eugene Fama and Kenneth French.
Please feel free to schedule a call at my website www.primewealth.com if you would like to discuss this further or reevaluate the appropriateness of your portfolio.