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Posted April 6, 2020

Investing is Always Dynamic

Forrest Bell, CFP

Forrest Bell, CFP®

The number of novel coronavirus infections and related deaths surged around the world in March. As reports of doctors and nurses working to exhaustion in overwhelmed hospitals reached the headlines, equity prices declined sharply. The sharp stock market selloff that occurred in the end of February proved to be only the first act, as equity prices fell an additional 25% in volatile trading sessions throughout March. While March was historically volatile, investors who stayed the course saw their losses halved after the federal stimulus deal was reached.

The uncertainty surrounding whether countries and hospital systems can manage the cases of people suffering from COVID-19 will likely keep volatility in the stock market high for the time being. And like the recent jobless claims report, there are more pessimistic economic reports to come, including a corresponding rise in the unemployment figures. While the consensus expectations are for a sharp economic contraction, followed by a recovery in the second half of the year, the current unemployment pain is real.

A note about economic forecasts: It’s important to remember that many of these numbers are reported on an annualized basis. Actual, absolute forecasted change is much smaller. For example, one large Wall Street bank made headlines with a forecasted second quarter GDP contraction of -24%. Since this is an annualized number, the actual predicted contraction is a much more manageable -6.6%.

Still, the economy is facing challenges from the virus, both directly and due to government-imposed mitigation efforts. The path ahead will likely be shaped by two main factors:

First, how long will the negative impact of the coronavirus persist? Second, once the quarantine and social distancing measures end, how quickly will economic activity return to a normalized state? Evidence suggests the answer to this second question is highly dependent on answering the first one. While we don’t have modern examples of widespread quarantines and their economic effects, examining natural disasters may give us some clues. JP Morgan used their vast data on business and consumer income and spending to examine the effects of Hurricanes Harvey and Irma. They found that there was a severe drop in both income and spending in the first week or two after the disasters hit, but things were mostly back to normal less than a month later, and there was no persistent increase in unemployment. These two events contrast with Hurricane Katrina, which was both much longer lasting and severe. Katrina’s negative economic effects could be observed more than two years after the hurricane had passed.

Investing is always dynamic because of the push/pull relationship between the recent past and the future. Often, the harder it is to stay invested, the better it is to stay invested. One can look back and lament the recent losses of March, but those losses also help create a better return environment for the future. Prior to the stock market selloff that began in February, most investment firms were forecasting that U.S. stocks would only generate annualized returns of five to six percent over the next decade. With a now lower starting point, these forecasts have been increased. On December 31st, Vanguard, for example, was predicting that U.S. stocks would average only 4.4% annually over the next decade. As of March 12th, they increased their forecast to nearly 7% annually.

The human and economic impact of the virus will likely worsen before things improve. However, financial markets are unpredictable and forward looking, and the economic effects of the virus will ultimately pass. As it has been in previous times of gloom, the best option for investors is to stay the course. Kindness goes a long way in times like these. Take good care of yourselves and your loved ones. And please reach out if we can provide guidance. We are here for you.

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