Coronavirus – We’re All In This Together

Coronavirus – We’re All In This Together

 This weekend, six states now have a “shelter in place” mandate that orders all residents to stay at home unless for essential work, supplies and services, and health and safety matters.  Additionally, all non-essential businesses must close.  We expect (and hope) that other states follow suit as we fight to slow the spread of the pandemic.

Now that the coronavirus has reached the U.S. and has spread across it, the best action for the economy and the U.S. is to take temporary pain for the long-term good.  The coronavirus has surpassed anyone’s expected measures of infection in terms of its contagion rate.  In our talks with epidemiologists, the main goal of a virus is to survive, and it does this by infecting new hosts and reproducing.  If it’s too fatal, the virus naturally dies out.  If it isn’t resilient enough and the body can kill it effectively, the virus naturally dies out.  The coronavirus is, unfortunately, hitting a sweet spot in this zone and at this point, the best action to fight it is by limiting contagion.

 From our perspective, the market, like the rest of the U.S. has started to settle into this new reality.  During this new normal, we continue to look for signs that the government and the Federal Reserve are enacting measures to ensure that the economy continues to function as it should during this time.  To this extent, the Federal Reserve implemented a variety of programs this morning to ensure that liquidity will still be available by buying assets from banks allowing them the ability to then lend that money to businesses.  The Federal Reserve is also looking into measures to directly help small and mid-size companies.

 On the White House front, we are looking for news of what the “phase 3” coronavirus bill will contain.  This bill is expected to contain stimulus measures to help businesses survive this new normal of limited mobility and social distancing.  It is also expected to provide direct stimulus to U.S. families.  The bill did not pass through the Senate with Sunday night’s vote and is currently back to the Senate for further negotiations and revisions. 

 Additionally, we see the President signing the Defense Production Act as a positive for the market.  If an already approved drug such as hydroxychloroquine (previously used to treat malaria) proves effective in treating coronavirus, the President can order all pharmaceutical companies to produce the drug.  Additionally, if a new drug is discovered, approved and treats the disease effectively, the President can order the same.  This will drastically decrease the burden on hospitals, allow social distancing and travel restrictions to be lifted and reduced, and speed up the timeline of economic recovery.

Coronavirus – Trying to Know the Unknown

Coronavirus – Trying to Know the Unknown

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The unknown impacts of the coronavirus are taking a toll on the market, as no one knows what the true impact will ultimately be.  Traders continue to sell the latest headlines increasing the volatility in the market and pushing stock prices further down.  Over the weekend, the spread of the virus in the U.S. continued to fuel concerns. Unrelated, Saudi Arabia declared it would begin to increase oil production which sent oil prices plummeting and added to the worries of an already skittish market. 

What we do know is that governments are in a precarious position of balancing the humanitarian impact versus the economic impact of the virus.  Candidly, the coronavirus poses only a slight risk to 85% of the world’s population (being those individuals aged 70 and younger with no preexisting health conditions), which also constitutes the majority of the global workforce. So, if governments were to keep a hands-off approach, we would imagine that the actual economic impact of the virus would be limited.

However, governments will (and we believe should) intervene to reduce the spread of the virus.  Governments around the world will take the steps they deem necessary to protect their citizens.  This intervention will no doubt cause an economic recession as supply chains are disrupted and the movement of goods and people is restricted, both domestically and globally. 

Currently in the U.S., we have only started to discover the number of cases present due to the delay in testing capabilities.  As testing ramps up this week, we expect the number of cases, and subsequently the number of confirmed fatalities from the virus to increase.  What we do not know is what level of intervention the U.S. government will take to decrease the humanitarian impact of the coronavirus.  Outside of Italy and South Korea, the larger outbreaks of the virus have happened in countries (China and Iran) where civil liberties are already curtailed.  The intervention of a country that is founded upon unalienable rights to freedom, in our opinion, will have to be more delicate and as of now are set at the state and local levels.

What the intervention and the subsequent market response will look like has yet to be determined.  We expect the impacts of the virus to be short-lived as summer arrives and we exit the flu season.  However, we also anticipate that a shallow and short-lived recession will occur as supply chain disruption and lower consumer spending has an impact on company earnings.  While they can be painful at the moment, these recessions are normal and part of the natural business cycle. 

When we don’t know the outcome of an event, it’s easy to feel anxious.  What is important though is to remember that these events happen and eventually end up being a bump in the long-term road to financial security.  What is critical is that you stick to the road map that has been laid out by your adviser and don’t detour in panic. 

-The Investment Committee