Coronavirus researcher
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What’s up with Coronavirus?

By David J. Haas CFP®
April 4, 2020

I am writing this from my home office, where I have been working for the past 2 weeks. I am lucky that I have plenty of work to do and Cereus Financial Advisor’s emergency plan is working well. We are operating, maybe not as efficiently as normal, but we are open and running, doing our best to meet everyone’s needs. Mike is also working from his home office and both of us are reachable by phone or email. I have been doing lots of video conferences and while its not quite as nice as face-to-face, it works.

Everyone is suffering in this crisis. I have talked to many people and I know of several who have likely caught the virus, some who are working hard to care for those who are ill, and others who have been furloughed or who’s businesses are in serious trouble because of Coronavirus. I wish those who are sick a full and quick recovery and I am thinking of all of you who are affected. Please contact me if I can be of any assistance.

This essay is primarily going to cover the economy and the markets, but unlike when I usually write about this subject, it will have to be more qualitative and less quantitative. Most of the available data for February and prior does not address the current situation. An event like the Coronavirus is known in the industry as a black-swan event. It’s an event which no one expected and pushes the economy into a recession and the markets down.  Before the event and after the event is not comparable.

Current Economic Condition

There is no question that we have gone into a recession. The last unemployment report with over 6 million people having filed for benefits proves this. Large swaths of our service economy: travel, dining, and brick and mortar retail are at a complete standstill. This is bad enough, but it threatens banks, landlords, and bondholders. A restaurant chain which has ceased operation is not going to pay workers, will stop paying their bank loans, and won’t pay their landlord. That landlord will not be able to pay their mortgage in turn. The mortgage might have been bundled with others into a bond and that bond might default and stop paying interest.

This is a worst-case situation and this is the reason the federal government has stepped in with aid. Furloughed and laid-off workers will get an extra $600 a week for 4 months in unemployment benefits so they can pay their own rent and mortgages. The restaurant can get aid so it doesn’t default on its bank loans. The Federal Reserve Bank will buy bonds, to keep the bond market afloat. The landlord may get loans as well. There is certainly a danger that all this aid is not enough. If the restaurant chain can’t stay in business long enough, then it might go into bankruptcy and those loans really will go bad. Keep in mind that there are many other sectors of the economy that will continue to operate or can sustain a pause their operations and their business will come back quickly. Hard goods such as cars and appliances are probably examples.

The Financial Markets

The S&P 500 was down 19.6% year-to-date as of March 31. From the high on February 19th to the current low on March 21st, the S&P 500 was down 31.79%. This is definitely a bear market, which is a decline of 20% or more. Other stock market indices have done even worse than the S&P 500.

The Federal Reserve bank has intervened to cut short-term interest rates to zero. The 3 month Treasury Bill rate has dropped from around 1.5% on February 26th to a low of -0.05% on March 26th and now rising to 0.12% on March 31st. So safe short-term rates are basically at zero. The 10 year Treasury rate has dropped from 1.88% on January 2nd to 0.70% on March 30th.

At the same time, there has been tremendous turmoil in the bond market, which although larger than the stock market, can suffer from poor liquidity. The Federal Reserve Bank has stepped in to provide liquidity. The Barclay Aggregate Bond Index (which often is used as an overall bond market measure) is up 3.15% year to date. Now that interest rates have dropped to near zero, its unlikely that there will be much return for the rest of the year.

The $BLEND60 index which measures a 60/40 portfolio is down 10.88% for the year as of March 31st. Many people have portfolios like this, although the $BLEND60 index is a hypothetical portfolio. If the risk in your portfolio was higher than the $BLEND60, then you might be down more, if it was lower, then you might be down less.

Virus Timeline

Before being able to talk about any kind of recovery, we need to discuss the virus. I don’t claim to be an expert, but no doubt you have seen the bell curve which shows the number of cases in two different scenarios.

If we institute social distancing and control exposure, we will reduce the total number of cases active at one time. By doing that we will avoid overwhelming the healthcare system and so reduce deaths. Living in NJ, I can tell you most of the people I know have isolated themselves. My family and I have been staying home, except for making  necessary trips for shopping, healthcare, and picking up the mail at work since March 16th. The good news is that so far, at least WE don’t seem to have caught the Coronavirus. The bad news is that there are many people who do have the virus in NJ. I have been tracking virus cases in NJ and in Bergen County. Here is the data for April 3.

New cases are continuing to rise at an accelerating rate. There is no question that testing has increased since March 16, when I started tracking. But until we see new cases start to level off and then fall on a consistent basis, its clear that we are in the upward part of the slope and have not reached the maximum number of simultaneous cases. The worst is still to come.

Experts are now saying they expect NY and NJ to peak sometime around April 15th. After that, we should see a slow decline in new cases as we enter the downward part of the curve. Unfortunately many parts of the country are behind NY/NJ/CT and their peak number of cases might be May 1 or even later. This means governors will be hesitant to lift restrictions, even in areas where the virus has already peaked. They will want to keep it under control.

Reopening of the Economy

I anticipate the NY/NJ area to be under lockdown until May 15th or even May 30th. After that there might be a gradual resumption of life with people allowed to go back to work, but with the ban on gatherings continuing until late summer. There will be tremendous pressure to allow colleges and schools to reopen in September. The travel industry will be basically dead for the rest of the year with the possible exception of house rentals. But you probably won’t want to rent a house at the shore if the beach is closed! Restaurants might reopen in July with tables 6 feet apart (and more outdoor dining).

So the economic recovery will be slow. I think peak unemployment might be somewhere between 15 and 20%, but supermarkets, home delivery services, healthcare, and warehouses for e-commerce will take up some of the slack. Travel and tourism was 2.8% of US GDP in 2017 and I would expect it to almost completely go away in 2020. That will probably drive the US into a recession for the entire year. In other words, this will not be a quick recovery, although I do expect it to accelerate once the virus is under control. But the rest of the economy will have to absorb the travel and tourism portion and I don’t anticipate that happening.

How could I be wrong?

There are things that could go right and improve the situation. Some of these have a real chance of happening.

  1. We could find a treatment for the virus so people don’t die. There are several anti-virals which companies are working on. One of those might actually work and might help it so people have a much lower chance of ending up on a respirator in intensive care and possibly dying. Even if a drug is found in May, it probably can’t be widely rolled out until September, but this would help really accelerate the economy because people will be less scared to venture out.
  2. We could really increase testing including home tests. Increased testing would really help us understand who is infected right away. If testing became easy and cheap enough to do once a week (or every day) for every American, only people who had the COVID-19 would have to be quarantined.
  3. The virus became less virulent in warmer weather. If was going to happen, I think we would know it by now, so I think its fairly unlikely. Remember, the virus is affecting tropical places too.
  4. Massive progress on a vaccine. I know the experts keep saying a vaccine is a year out. But if some real logistics experts ran a Manhattan project to develop and produce a vaccine faster, maybe we could have one by October instead of next March. The problem is that the whole world needs it, so governments would probably have to take the license and give it away free to most of the world. If you think some Pharma company or Biotech is going to be able to sell it for $1000 a dose or more, think again.

Your Investments in 2020 and Beyond

With the economy in recession for the rest of 2020 and earnings horrible for the first two quarters, what’s the prognosis for your investments? There has already been significant downside, but the real question is whether the economic catastrophe has been priced into the market. The other thing I haven’t mentioned is government intervention in the economy. Since this recession has not been caused by corporate bad behavior, both Republicans and Democrats are likely to agree on massive stimulus and help for the economy. This should help mitigate some of the economic issues. The stock market loves nothing better than massive stimulus, so its certainly possible we have seen the lows. By summer we might be seeing green shoots in the economy and that might pick the market up too.

The Fed will continue to backstop the bond market. They will want to keep rates very low, but they will make sure there continues to be a market for bonds. The real risk will be bankruptcies. If enough companies go bankrupt, it will hurt the lenders. Banks could be affected as well as insurance companies which buy bonds. I expect the Fed to look at this closely and find a way to prop up these institutions. The Fed cannot let these institutions fail. They have shown that they will intervene to make sure it doesn’t happen.

There is another wave of issues which worries me: municipal bonds. State governments will be under significant stress, especially NJ, NY, and CT. I can only hope the Republicans decide to provide enough aid to these states to ensure they don’t go bankrupt like Puerto Rico. A situation like that would be truly devastating. It will be important to keep a diversified municipal bond portfolio and to be careful of General Obligation (GO) state bonds. Unlike Puerto Rico, I don’t think these states have built a pyramid of bad bonds, so revenue bonds shouldn’t be brought down by state failure of GO bonds.

What are we doing at Cereus Financial Advisors?

We are continuing to operate at Cereus. We are evaluating our clients’ investments and suggesting changes when we think that is necessary. Things are a little slower when working at home, but rest assured, we are hard at work. In fact, I hope to announce a new team member very shortly. Stay tuned….

You can call or email us. Instead of in-person meetings, we are doing phone and video meetings.

How are YOU doing with the virus? I hope you and your family are healthy. Please call and let us know how its going!

Next Up

I will write about some of the incentive programs in the recently passed stimulus bills and what to do if you are furloughed. If that doesn’t happen to you, then it will probably happen to someone you know. Stay tuned.