While the British refrain of Keep Calm and Carry On is very good advice under many circumstances, with new problems come new anxieties, and Keep Calm and Self Quarantine doesn't have the same ring to it.
The stock market has priced-in a full recession, which is possible, but the way the stock market traveled to bear market territory in under a month is much more indicative of panic selling than proper analysis. Even in recent days, the wild swings in the market, both up and down, are overstated in my opinion. These moves are irrational, and somewhat driven by computers and leveraged derivatives (such as the Futures market you might be hearing about in the evening and early morning). The owners of actual stocks who can hold their stomachs and stay on the roller coaster will almost certainly end the ride in a much better place than those who bail.
To be clear, this is not an economic or market problem being created by structural weaknesses or the economic cycle, this is an exogenous event that is a shock to the system. Recency bias can wreak havoc on the psyche in this case, as our last two bear markets were structural: a tech bubble and a real estate bubble. We haven't had an event-driven bear market since 1987, which you might remember recovered much faster than our more recent bear markets.
It is especially important to NOT compare this to 2008. The American banking system is in good shape walking in to this mess. For the past ten years, banks have been forced by regulators to maintain liquidity, pass stress tests, and plan for the worst even when things were great. These requirements had significant costs, but now we can enjoy the value. The recent moves by the Fed to provide even more liquidity to the banking system is just another card played in the system's deck of tools.
Furthermore, consider the jobs numbers released recently. They show a pretty strong underlying economy that wants to continue moving along to deal with normal problems like a tight labor force, a trade war, and a presidential election. This is a well maintained car that has hit a speed bump, not a jalopy in a head-on collision.
We've written before about how hated the bull market of the past ten years has been and how so many people are looking for an excuse to sell. For years, we have advocated for our clients to:
We are steadfast in this process, even today. So, we are taking this opportunity to think about buying stocks that we already liked at prices we haven't seen in a while. At the same time, longer-term research of other stocks, bonds, and beyond continues.
The virus does pose a near-term risk to the economy if pragmatic quarantining and other virus risk mitigation leads to a significant enough reduction of consumer spending and other important economic drivers. How can we think about this shock? One analogy I am using is a hurricane:
At least with this crisis, we still have electricity and running water, luxuries the victims of hurricanes often have to do without. Consumer spending will certainly change, but our increasingly internet-based economy does allow for more commerce than ever before during a period of sheltering-in-place.
For businesses, this is probably going to be a tough year for tourism, oil drilling, and sports, for example, but those industries have been hit hard before and still exist today. In fact, for many parts of our economy, business will continue even if large numbers of people are asked to stay home for a period of time. More and more of the work done by American professionals can be done remotely, thanks to technology.
On that note, at Exchange Capital, we have spent years incrementally building out our staff, technology, and processes to allow our team to work in various conditions. While we will miss the in-person office banter, our business can function at a very high level under many different scenarios, including this one.
I do worry about employees and small business owners in our communities who can not continue to work during this time. Layoffs and bankruptcies caused by a short-term cash crunch is not good for them, their creditors, or the economy. Washington is considering policies to help relieve the pressure on these folks.
On this point, though, you might be able to help mitigate the problem. If you have any individual service providers, such as a house cleaner, a personal trainer, or your daughter’s piano teacher, you might be missing some appointments in the next month or two. If you can afford it, pay them something anyway. Even from a self-serving perspective, it will earn you a lot of goodwill.
I am not an epidemiologist, so I won’t try to get into the weeds here. I do have a little advice, which applies to all emergency planning. Think back to past community emergencies that have affected you. What went wrong and right for you? I am confident you learned something from those experiences that can be helpful today. For me, I think of Hurricane Andrew in 1992, 9/11, the power outage of 2003, and the Boston Marathon bombing in 2013.
The most sensible things I've learned for us all to do right now: wash your hands more, touch your face less, definitely stay home if you feel sick or have been exposed to someone who is sick, and stay away from other people as much as possible.