I thought I would post something here after a while of getting more information. I don’t work in the financial industry but my line of work does get presentations from economists which gives us the US and global outlook. The short answer is that the economists cannot confidently model how the world economy will look until everything shakes out and if there is a second COVID-19 wave. As everyone knows, local businesses drive all commercial/service economies as the end of the supply chain, and that part of the chain is not working right now.
The current modeling as of 2 weeks ago has the US projecting to have up to negative 30% GDP next month and an unemployment rate of about 18% nationally by mid-summer if not sooner. This will be the second highest percentage since the 1929 Great Depression. The 2008 Great Recession will pale in comparison to what COVID-19 is doing.
Each State will have different unemployment and GDP impacts. We have seen the PRC’s GDP dropped its projection from the earlier 5% to 6.8% and this is consistent with the world economy looking at negative 7% GPD by end of 2020. Certain economies will be harder than other and COVID-19 is moving a like wave all over the world with infections, outbreaks and deaths all varying times.
They reminded us that the COVID-19 impact is not as simple as a closed business reopening and getting government financial assistance. It is how much of the workforce and consumers will need more time to physically and emotionally recover to be able to got to work and rebuild is a question no one has an answer to. What is the level of consumer confidence going to be in a COVID-19 world, especially if there is no vaccine or antibodies that can fend off re-infection? There is no answer for that yet either.
The economists all this warn that their modeling will change as well as everyone else depending on how things keep playing out. They may improve or get worse. The economic timeline is dependent on the pandemic, which unlike other recessions, which it is largely driven by the financial industry. Most typical recessions you can figure out what the financial industry options are toward recovery. A disease does not care about the economy and there no proper way for all us to respond to it.
What does this mean on buying into the stock market? The previous posts correctly hit on the key sectors to put money into stocks that will grow fast in response to the pandemic, such as healthcare. In a bad economy, I use oil, gold and long-term bonds as my indicators of where investors are going. Oil and gas drive the world economy and prices are very poor for obvious reasons. There are millions of barrels in the US that has not been put into the market because of the shutdown. This means the even after things reopen, oil and gas should stay low until those in storage starts to empty rapidly. To me higher gold prices means investors are looking for a safe harbor and gold has not jumped very much. Long-term bonds have been in discussion about this reverse bond yield as a recession indicator, but COVID-19 made that as an indicator moot.
The US stock market has been subject to a lot of spot trading on people to turn a quick dollar but that will slow down at some point. The Federal Reserve Bank has purchases trillions of dollars in bonds considered high risky to help keep money moving through the economy and that is helping to keep the US stock market from seeing a massive dip like March 23rd. The goal of the Federal Reserve Bank is to do anything it can to prevent a depression and create assurances on debt. If there is a massive debt default throughout private and government sectors, you will see a depression that may make 1929 look tame in comparison.
I have been told that the US $2.2 Trillion CARES Act is one of four major economic stimulus packages coming out of Congress. They may package them into bigger bills or break them up in smaller ones depending a series of factors. The $350 billion in aid to small businesses was consumed inside of 10 days and Congress is trying to work out something between $250 and $500 billion new aid for small businesses. I am projecting Congress will spend $4 trillion directly into the economy or about 18% of US GDP. This will be the biggest increase to the US debt in history and is borrowing at a rate we have not seen since World War 2.
The EU has approved is COVID-19 package, which will send positive signals to their stock markets. They EU still need to figure out a massive economic aid package for its member nations relatively soon. Both Korea and Japan have economic aid packages in the works. The world’s top economies should have more than one economic aid package before the end of the summer. I am worried about more than a few big economies and whether the government can lead them out of this crisis.
Is it a good time to buy stocks at all? The answer is if you have extra money for long term investment, then yes. There are no clear indicators right now of when things will rise or drop, so just buy if you can spare the money then you should. If you are doing retirement planning for twenty years from now and you have stable income, this is a good time to put more money in.
As always, speak to your financial advisor. They will tell you to ride it out, but the question is what should be riding right now.
I am hoping for another update in May about what the next set of modeling may look like. | |
