With such fear and concern manifested in the markets over the past few weeks we wanted to address investor’s concerns and perhaps calm some fears. I believe the 2nd quarter of 2020, ending June, will be the worst quarter in terms of GDP since the (8.4%) experienced in the 4th quarter of 2008.
A quick review of history shows us we have experienced 10 recessions since WWII; all of which turned markets negative. This time is no different. Since markets tend to predict economies 6 to 12 months in advance, the markets tend to turn up before the economy turns.
As for the Covid 19 Virus: China’s reported and mortality numbers appear to be improving. It seems their quarantine and lockdown measures are working with about a 6 week lag from time of lockdown to an improvement of the news, based on information we are receiving from Singapore, South Korea, and other more trusted nations.
The Trump administration’s monetary stimulus is incorporating significant stimulus measures through public monetary policy, actions behind the scenes, and with fiscal stimulus. In order to stem the tide and correct the recession so we don’t slip into a depression, we know the size needs to be equal to 3% – 4% GDP or North of 1 Trillion dollars. By comparison the fiscal stimulus known as TARP back in 2008 & 2009 was about ½ trillion dollars, this fiscal stimulus is approaching 1 trillion dollars. There will be more to come from Congress over the next few weeks.
In reading and hearing folks question why the hysteria and fear of illness has been so magnified our answer is simple; as corporations plan for demand shock, their employees are worried about job loss, or temporary lay-offs. This causes a significant reduction in the velocity of money which is driving more corporate responses and ultimately more consumer responses. The cycle gets larger before it subsides.
On the medical front we can’t discount the virus mutating as a worst case scenario. Conversely we can’t discount a medical breakthrough utilizing medicines such as those that treat AIDS or SARS or a combination. Both methods are in human trials.
Since WWII there have been 9 medical outbreaks that have affected the markets, in every instance the economy has had a “U” shaped recovery while the financial markets had a “V” shaped recovery. We are somewhere on the left arm of the V headed down the negative side. No one can accurately time the bottom. Own quality investments, be diversified, and trust the process. You will get through this.
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