Why So Much Volatility?
Why are the financial markets so troubled right now? It’s very simple; the markets are assuming higher unemployment, lower earnings, negative GDP growth, and lower corporate and consumer spending. These conditions are characteristic of a recession.
You will see some in the media talking about the probability/possibility that we are headed towards a recession. I’ll go out on a limb and make a prediction; the recession has already started and will last at least for a few months. When you shut down an economy as has been done in the United States (as well as around the world), it’s virtually inescapable that we enter into a contraction of economic activity.
A recession as defined by Wikipedia is:
“In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, or the bursting of an economic bubble. In the United States, it is defined as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales".
As you can see from the chart below, recessions have always been a part of the economic picture in the United States. The depth of the downturn varies.
Annualized GDP change from 1923 to 2009. Data are annual from 1923 to 1946 and quarterly from 1947 to the second quarter of 2009.
It is my expectation that the downturn in economic activity will be equal to what occurred during the 2008 financial crisis. The economic headwinds lasted for a significant period of time and I believe that will be the case during this recessionary period.
What remains to be seen is as how long the recession and downturn will last. I cannot emphasize enough how important Federal Reserve and governmental action is in this environment. The current policies and actions taken so far have been a good first step and includes the following:
- Interest rates to zero
- Repurchase agreements to help liquidity in the financial markets
- Coordinated action with global monetary agencies
- Backstop money market funds to maintain consistent net asset value
- Quantitative easing buying fixed income in the open market
- Expansion of unemployment benefits
- Sick leave extension
- Increase in SBA loan activity
- Waiver of foreclosures for home mortgages
- Extension of IRS payments beyond April 15
There are additional steps to come from the Federal government and we believe a package of over $1 trillion dollars will be passed in the next week. This legislation will lead to direct distribution of monies to individuals under certain income levels, small businesses that are struggling, impacted industries that are suffering from virtual shutdowns, and other items currently under discussion.
I believe these activities are necessary to backstop the US economy. As I said in a recent CNBC interview, monetary and governmental intervention is what will swing the tide towards economic recovery.
Recovery Will Happen
There is no doubt in my mind that the US economy will recover. There is no doubt in my mind the equity markets will recover. But I also believe that we should not understate the severity of this crisis as it is going to take time for conditions to stabilize.
It is going to take time for the economy to get back on its feet. We should recognize that this will not be solved in three months but instead will take longer as the damage to the economy and national health is significant.
Looking for Positive Health News
Lastly, everything is dependent on beating COVID-19. If the virus slows or the pandemic has declared to be under control, that will spark a resurgence of economic activity. If the United States tracks on the path of South Korea, you will see a positive swing in perspective.
It is our hope and prayer that we do not follow Italy and that is the goal of health professionals, leaders, and every citizen in the United States. As a proud American, I’m hoping and believing we will win this battle.
Here to Help
Next week I will have a new video update outlining my views and answering some of the questions I am asked during this difficult time. I’ll be appearing on CNBC Europe this weekend and I’ll make sure I get you that link to you.
Keep social distancing everyone. We will get through this. As always, we are still working at 100% to watch over investment strategies. Feel free to reach out to us anytime with any questions. And remember if you hit reply, it comes directly to me and I will personally answer you.
Be safe everyone.