Will the Coronavirus Bring our Economy Down?
Note: This article was originally published on February 26, 2020 and has not been updated since then.
The statistics are staggering. There are over 80,000 confirmed coronavirus (COVID-19) cases, and the global death toll is around 2,700. The first outbreak began in Wuhan, China, but cases are popping up in other parts of the world: Italy, Iran, Japan and South Korea. Even the U.S. isn’t exempt from this concerning virus: the CDC has 14 confirmed cases in the United States over the last month. Federal health authorities are preparing for a pandemic.
Beyond health concerns, you may be wondering about the economic impact of this crisis. Liz Ann Sonders, Senior VP and Chief Investment Strategist of Charles Schwab & Co., offers excellent insights in this article. Nonetheless, the market commentary is detailed and lengthy. These are the finer points that I gleaned from reading Ms. Sonders’ article:
1. The problem is not isolated to China.
We’re already seeing confirmed COVID-19 cases in other developed nations, and the global supply chain is impacted. Production slows and global economic growth declines. First quarter earnings estimates have fallen the most in consumer discretionary, industrials, and materials industries.
2. This could be worse than the 2003 SARS (Severe Acute Respiratory Syndrome) outbreak.
China moved from 4% of global gross domestic product (“GDP”) in 2003 to 16% of global GDP today. Asia Pacific is a driving force of U.S. and European economies, with a correlation of nearly 0.8 on a 1.0 scale. Chinese tourists now outnumber American tourists globally. Additionally, China became the world’s largest exporter of goods ten years ago. The country represents over 1/3 of global gross output.
3. Rate cuts are likely.
This may only be the beginning of bad news as the coronavirus spreads globally. At least two U.S. interest rate cuts are expected in 2020, according to the fed funds futures market. Bond prices have an inverse relationship to interest rates. When interest rates decline, bond prices usually increase. That’s why bonds are perceived as “safer” investments; they will typically hold value better than equities in economic downturns. Investment portfolio diversification is important in any economic environment and even more critical now.
As the Franklin Templeton Global Macro team shares, the full extent of coronavirus economic implications are still unknown. COVID-19 is highly contagious and may not show symptoms for up to 14 days. On the bright side, the fatality rate is lower at 2%. The aggressiveness of the disease means containment measures could cripple economies beyond China.
So, all of this doom and gloom begs the question:
What’s next?
Should you stay inside your house 24/7 and cash out of the stock market? I wouldn’t recommend it. Instead, here’s my three-pronged advice:
1. Focus on things within your control.
Whether the U.S. enters recession territory is entirely outside of your control. Contraction in the manufacturing sector, GDP growth, and other macroeconomic factors cannot be changed by a single family.
Instead, aim for a comfortable cash cushion that you can use if you or your spouse loses a job. Foster great savings habits, so you’re not forced to sell valuable items at a reduced price if the recession hits. Begin writing a gratitude list that will leave you uplifted rather than frightened.
2. Gain perspective.
The last recession in 2008 left many of us fearful of the future, and that is largely because it wasn’t just any recession. It was the Great Recession, a global economic crisis that caused millions of people to lose their life savings, jobs, and homes.
Recessions are a natural part of the business cycle. Including the Great Depression (lasting from 1929 to 1938), we’ve had seventeen recessions. The 2008 recession was the worst financial crisis in the U.S. since the Great Depression and also the longest one -- lasting nineteen months. The next recession will likely be less severe than the last one we experienced.
3. Use this as a teaching moment.
The financial literacy statistics are grim. Only a quarter of teens achieved a passing score in a recent online financial literacy exam, and the average score was just 58%.
Parents are the best teachers! If you have a teenager or young adult, start money discussions now. Introduce your son or daughter to the stock market. Pick a hypothetical basket of stocks to track performance monthly. Better yet, let your child see the brokerage statement if you already have a small account set-up for him.
Also, let your kids know about personal values that influence your decisions. Do you value frugality over consumption? Does your investment portfolio contain socially-responsible funds? Do you have a long-term, rather than short-term perspective, on investment performance?
School is full of dates, facts, and memorization. Talking with your kid about timely, relevant ideas will be a welcome respite from traditional homework.
The record-breaking stock market returns we experienced in 2019 are unlikely to happen again this year. As uncertainty looms, rebalance back to your target asset mix and stay diversified.
At WorthyNest®, we guide parents through important financial decisions using a values-based approach. Contact us to explore a one-on-one relationship.