The Economic and Market Shock of the Pandemic

As we continue to fight through the health consequences of this virus pandemic, our thoughts are with those on the front lines fighting the fight for all of us. First responders are heroes and deserve our thoughts and prayers. Difficult days lie ahead on the health front and we expect peak darkness to be sometime in the next couple of weeks. During these moments, it’s important to try to recognize that there will be a light at the end of the tunnel after the curve begins to flatten.

Impact on US Economy and Markets

As investment managers, we are charged with assessing what the impact will be from the virus on the US economy and markets. As I shared in my previous update, markets and economies do not necessarily move together. In fact, markets are often a leading indicator of economic news and data. The fact that equity markets have plunged as much of they have suggests that the economy will go through a very difficult patch.

Let’s be realistic about what we are facing here. It’s going to require patience and time for things to stabilize and move back towards normal. This is certainly understandable considering the incredible trauma impacting global economies around the world. It means we will need to endure headlines that may seem to suggest that there is no hope. The truth is, however, there is hope.

Stimulus Now and in 30 days

In response to the inevitable economic slowdown, a $2 trillion stimulus bill was passed designed to provide bridge loans and grants to small businesses and industries specifically affected by the crisis. Additionally, unemployment coverage was increased for many. This bill will have much greater impact than $2 trillion as it authorizes the Federal Reserve to insert an additional $4 trillion into the economy as needed. $6 trillion is an unheard-of stimulus package but passed with support from both parties and the administration.

While there is some resistance against a fourth stimulus package, I expect an infrastructure bill to be proposed and passed sometime in the next 30 days. It would not surprise me to see another $2 trillion in stimulus infrastructure spending designed to provide jobs that are shovel ready. There will no doubt be arguing about the miscellaneous partisan provisions that will be attached to an infrastructure program; this is how Washington works. But I do expect a stimulus program will be passed.
 
Will It Work?
 
Given the massive financial intervention, it’s a reasonable to ask:

• Is the economic stimulus action big enough to have a real impact? 
• Will we be able to bounce back in short order from this virus crisis?
• Will we see a V or U or long L shaped recovery in the economy?
• How will this crisis impact global economies and how will that ripple through the United States?

These are all very good questions that we are analyzing and assessing. One thing I can say with confidence; we are convinced that the action taken will have a huge positive impact on the economy.  
 
U or V or Long L Recovery?
 
We are leaning towards a perspective that a sharp recovery (90 days) is likely not realistic. We expect the virus impact on the economy to last well beyond June and, for that reason, we believe there will be residual effects that will last for some time. 
 
Whether or not we see a V or U or L shaped recovery is yet to be determined and will, in large part, be determined by virus related news. One might expect that if a treatment is developed near term that could very well have an impact on economics and sentiment. But factual economic data is not the only consideration. 
 
What will market behavior look like as glimmers of hope emerge? As we saw a recently with the strong market rally, sentiment can swing strongly in either direction. Guessing short term moves are simply guesses. In our view, the question one should ask is what time horizon rules investment decisions.
 
Time Horizon: Long or Short?
 
Remember what I said in my last video update. If you are retired and withdrawing 3% of your portfolio, 97% of your portfolio has a time horizon longer than one year. That’s important to keep in mind as you watch fluctuation and volatility on a daily basis.

Also remember, you have to be able to sleep at night as well. For that reason, one needs to assess how one is feeling and if the market and economic uncertainty is too great. Adjustments to strategy can occur as long as one understands the risks associated with those adjustments. If one goes to cash or increases cash holdings, at some point one will need to determine when to get back in the market. As we saw recently, those decisions may need to be made on a very quick basis; the market can turn direction and go in an opposite path. Market timing in an uncertain environment that is significantly impacted by virus news is a guess at best.
 
Recovery Will Happen Despite Difficult Short-Term Headlines
 
Here’s what we do believe. We believe the crisis will mitigate and that the economy will begin to recover. We furthermore believe that the American economy is resilient. One should never underestimate the desire of consumers to spend and businesses’ desire to grow. There may be winners and losers that come out of this economic crisis, but overall, the economy will recover. And if one has a time horizon longer than six months, that’s undoubtedly good news.

I want to repeat what I said at the beginning of this email update. It’s going to require patience and time for things to stabilize and move back towards normal. This is certainly understandable considering the incredible trauma impacting global economies around the world.

Short term the headlines will be challenging. Expect to see difficult news on the health front for at least the next three weeks. I would also expect to see very difficult economic news on the US economy for at least the next two months. Don’t be surprised when this occurs; this is what is going to happen. What you need to be thinking about through those headlines is what your long-term perspective is for your portfolio strategy and how it maps to your long-term goals.

I continue to strongly believe we will get through this and survive on the other side of the bad health and economic news. It’s not easy I know. If you would like to talk about this or any other issue, please reach out to your DWM advisor. And as always, reply to this email and I am happy to talk directly with you as well.
 
Be well and be safe. Next video update will come to you early next week.