A Financial Guide to COVID-19; Coronavirus (Pt. 2)
Listen: A Financial Guide to COVID-19
In the first part of this article, we discussed COVID-19 - the history, the current situation, and the future. In part two, we will go in-depth on what we know, the decisions from the government, and our economic and financial outlook.
The key in all of this – after studying previous epidemics and monitoring the situation closely – is how the government is reacting. What are they doing and why are they doing it? What does that tell us about the future of the economy?
The Investment Market
To be blunt, we are in bear market and we do not currently expect a v-shaped recovery. In other words, we do not expect the market to hit the bottom and bounce right back up. This will most likely be a long recovery process.
Here’s the largest impact: stocks have not been this attractive versus bonds since the 1950’s. Generally, if you’re looking to retire and need a steady income for the next 20+ years, we would put that money in bonds.
At this point our investment committee is asking the question “how much safety do we want in bonds and how much growth do we want in stock dividends?”
In addition to COVID-19, the price of oil has dropped significantly. Essentially, global oil demand started dropping when flights and cruise lines started being canceled.
In a nutshell, Saudi Arabia went to Russia and said, “hey Russia, we should start producing less oil.”
And Russia said, “no, let’s bankrupt some of these small American fracking companies. Let’s just let prices fall for a while.”
Saudi Arabi and Russia can afford to let oil prices continue to fall for a while. Large U.S. companies can let the price of oil continue to fall for a while. However, the small American oil companies cannot and that will continue to impact our economy.
How Deep Will This Be?
The Purchasing Managers’ Index (PMI) is “a measure of the prevailing direction of economic trends in manufacturing” (Investopedia). Supply chain managers are surveyed on a monthly basis regarding their, well, purchasing. The results are an indicator of economic activity in the U.S.
The PMI has been dropping recently. Should the PMI bounce back soon, then everything will be fine; however, if it continues to drop substantially similar to 2008-09, it can be an issue.
Your advisor is more interested in monitoring the PMI – it’s not necessarily something that you need to be checking.
Three Types of Bear Markets
Source: Goldman Sachs
A cyclical bear market is old school. Like 1920’s old school. The premise of a cyclical bear market is just as it sounds: businesses function in cycles. There are booms and there are busts. So, as an investor we can have an inkling as to when the next bear market may occur. The average length of a cyclical bear market is close to two years.
A structural bear market is the scary one. It’s similar to what we faced in 2008. The cause of a structural bear market generally lies in the failure of our financial sector and the stock market. The system fails to work and that’s when things begin to fall apart really quickly. A structural bear market can last as long as four years.
An event driven bear market is what we have today; there’s an immediate cause. Coronavirus and dropping oil prices caused this bear market. Typically, an event driven bear market will cause the market to drop about 30%. The average length of an event driven bear market is usually less than a year.
The question is, what kind of bear market are we in?
Yes, event driven. Easy enough. However, if it goes on long-enough, it becomes cyclical. The Fed can see this – they can see what’s unfolding – and they have done everything they can to stop a structural bear market. This doesn’t mean they’ve eliminated the possibility. They’ve simply taken every precaution that they can to limit the chances of a structural bear market. We’ve seen them:
- Cut rates by 0.5% to increase liquidity in the system
- Promise $500,000,000,000 to banks for overnight lending
- Release various stimulus packages
All with the intent to stimulate our economy.
The Fed knows that if we allow this to continue, we may face a bear market similar to 2008. With that said, the Fed has proactively taken these measures, whereas in 2008 they waited months and months to act.
The Bottom Line
Until we fully understand the magnitude of coronavirus, it’s tough predicting how bad this will be and how far down we will go.
What we do know is that stocks appear very attractive relative to the 10-year yield and that’s what we’re looking for. We will continue to monitor risk in your portfolios along with the current buying opportunity.
At Denver Wealth Management, we will continue to utilize our accumulated knowledge during these events in order to help position you to address your financial goals.
We cannot predict the future. We cannot predict the market. But we can make sure that we are the best educated and best prepared advisors that we can be.
Our goal, along with mitigating risk and assessing the buying opportunity, is to continue providing reliable and updated communication. We want you to know what’s going on in the market and what we’re doing to keep you in a position to address your financial future.
Thank you for reading/listening/watching. We are here to help. If you have a friend, family member, or co-worker who is worried right now, we would be happy to talk with them.
Please do not hesitate to call if you have any questions about your portfolio.
All information is believed to be from reliable sources; however, Denver Wealth Management and LPL Financial make no representation to its completeness or accuracy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The organizations mentioned are not affiliated with Denver Wealth Management and LPL Financial.
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