By John Halterman
"This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the global financial crisis."
-IMF April 14, 2020
1. COVID-19 SUMMARY
The first wave of infection continues to grow.
The U.S. currently has over 1.1 million cases, with between 25,000 and 30,000 new cases each day.
U.S. deaths have surpassed 66,000.
Last Friday, 2,909 people died of COVID-19 in 24 hours, the highest one-day death rate yet in the U.S.
The main cause of uncertainty with COVID-19 is that it is difficult to know how many people have been infected, if they can be re-infected, and there is no cure, treatment, or vaccination.
There are more than 3.5 million cases worldwide.
Many now believe that we will not have an effective recovery until there is widespread and accurate testing, a cure and a vaccination-the last of which could take 12 months.
2. CARES ACT AND ADDITIONAL STIMULUS MEASURES
The CARES Act was passed on March 27 and is a $2 trillion stimulus bill that provides $500 billion in company loans, $350 billion in small business aid, $600 per week in unemployment benefits, and $1,200 stimulus checks for individuals earning less than certain amounts.
On April 24, Congress passed a new COVID-19 relief package totaling $484 billion that provides an additional $310 billion for the Paycheck Protection Program, $60 billion for small business aid, $75 billion for hospitals, and $25 billion for COVID-19 testing.
Other stimulus measures have been passed allowing extended unemployment and sick and family leave and also delaying the tax filing and payment deadline to July 15.
3. CONCERNS ABOUT STIMULUS SPENDING
The Federal Reserve's emergency actions have expanded the Federal Reserve's balance sheet to $9.3 trillion, nearly double the previous record,
and has expanded the 2020 deficit from $1.1 trillion to over $3 trillion.
This could put the U.S. debt-to-GDP ratio around 100% or higher, more than the maximum recommended by economists. Exceeding 90% could cause an economic slowdown, especially if the stimulus package causes inflation and interest rates to rise, harming the U.S.'s ability to pay off its debts and putting downward pressure on corporate earnings.
Unemployment payments in excess of normal wages are creating disincentives for Americans to return to work until August, when unemployment benefits are due to expire.
4. WHAT'S GOING ON IN THE MARKET RIGHT NOW?
The ECRI, a leading economic indicator that tracks jobless claims, mortgage applications, and high-yield bond spreads, is at -24.11, a record low. Six of the seven recessions since 1967 have been preceded by the ECRI going negative.
Earnings season has begun, and with more than 50% of the S&P 500 reporting earnings, it appears that year-over-year earnings will decrease 13.7%, the most since the third quarter of 2009.
U.S. consumer spending has decreased by 7.5% month-over-month, the most since 1959. As a corollary to this, U.S. credit card spending has decreased by 25% year-over-year.
There are 30 million unemployment claims, and we will likely see a 15% unemployment rate for April. Fortunately, according to the Wall Street Journal, claims have likely peaked.
GDP predictions for Q2 range from an optimistic -12% from Citigroup to a pessimistic -38% from Morgan Stanley. There is a broad consensus that the Q2 GDP will decrease significantly, followed by a less significant Q3 decrease.
The VIX is at 37.19, having come down from a peak of 85.47 on March 16, is still significantly higher than its usual range of the low teens.
China's GDP has contracted by -6.8% for Q1. This is the first time China's GDP has contracted since it began reporting GDP in 1992. This is concerning because China usually takes every possible measure to prevent its GDP from contracting.
Less than 25% of S&P 500 stocks are trading above their 200-day moving average, indicating that the market is still not recovering broadly enough.
The recession caused by COVID-19 could optimistically be classified as an "event-driven" bear market by some, which usually lasts for nine months and involves an average drawdown of 29%. Unfortunately, an event-driven bear market can become a structural bear market, which would likely last longer (42 months) and have a higher drawdown of -57%.
5. HOW WILL WE MOVE ON?
Some have predicted our recovery could take a "V" shape as current market gains indicate an anticipated speedy recovery. However, others suggest that
dire news is not being factored into recent gains, and that the recovery could look more like a "L" or "U" as even after there are treatments available, the economy could take months to resume functioning.
According to Liz Ann Sonders from Charles Schwab, in the future we will see:
An increased debt-to-GDP ratio from countries spending their way out of recessions
Decreased globalization as distrust of China grows
Increased health screenings and decreased tolerance of working while sick
More fiscal caution from both businesses and governments that realize how unprepared they were for COVID-19
Increased cautious behavior from individuals regarding financial decisions and social interactions
6. TRIED AND TRUE INVESTMENT PRINCIPLES
Look for investment opportunities and stay focused on how you can benefit from short-term dislocations.
Use the market decrease to employ sound financial planning and tax-planning principles, such as tax-loss harvesting, moving cash off the sidelines, funding retirement accounts, Roth conversion, asset location opportunities, estate planning and gifting.
Ultimately, the equity markets will recover, as it always does. It has provided a 6.1% annualized historical return over the past 20 years, pandemics and global financial crises notwithstanding.
In the meantime, we believe there are always opportunities. In the current economic season, winning investments will fall into one of two baskets:
Basket I: Asset Classes with competitive advantages that lend themselves to weathering the pandemic ("Stay at home" stocks, cloud technology, consumer staples, utilities, hard assets, US dollar, cash and short-term treasuries.)
Basket II: Equities with large balance sheets that can ride out the pandemic
7. AND DON'T FORGET FOR NOW...
Stay safe and healthy and take proper precautions.
Make sure your estate planning documents are in order (including a health care power of attorney) and living will.
Create a plan of action and "to-go" kit in case you or a loved one contracts the virus.
Please don't hesitate to contact us with any questions or concerns at 304.626.3900. We'd love to chat with you and your family.
As always, be safe and well.
John Halterman, best-selling author and nationally published blogger, has been featured as a financial guest expert on the shows of self-help gurus Brian Tracy and Jack Canfield, author of Chicken Soup for the Soul, and has appeared on ABC, FOX, BRAVO, NBC, CBS, and A&E. John is the expert host of the weekly WDTV News 5 segment “Solutions 4 Financial Independence.”
As an authority on wealth management, he has been invited by hundreds of institutions such as universities, federal agencies, professional associations, and large energy and utility corporations to be a guest speaker and educational event host. Event topics include retiring ready, managing down market investment risk, how to reduce your tax burden, and transferring your family wealth in the most tax advantageous way.
John is the founder and owner of Beacon Wealth Management, specializing in helping entrepreneurs, professional practitioners, and retirees overcome the 5 major challenges facing successful families. He is a warm communicator with a passion for helping people transform their financial futures. John understands the multifaceted set of financial worries people face as they become more successful and enter the Retirement Red Zone. He empathizes personally with each client and delivers a collaborative client experience that empowers people to reach their life goals.
With more than two decades of experience, John’s professional credentials include Certified Wealth Strategist, Accredited Investment Fiduciary, Certified Estate Planner, Chartered Federal Employee Benefits Consultant, Professional Plan Consultant, and Registered Financial Consultant. He is also a past member of Ed Slott’s Master Elite IRA Study Group.
A native of Weston, West Virginia, John served in the United States Air Force prior to becoming a wealth advisor. Today, he resides with his family in Clarksburg, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-oriented man, he enjoys giving back to his community, coaching youth sports, landscaping, architectural design, and playing racquetball.