Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, March 05, 2020

What is the impact of coronavirus?

In the last week of February alone, the S&P 500 dropped almost 13% from all time highs. On March 3rd, the Federal Reserve lowered rates 0.5% to support economic activity. All of this was in response to the Coronavirus, or Covid-19, a potentially fast spreading virus that is hard to detect and for which we have no vaccine. With few cases in the United States, and precious little information about the virus, what really is the economic impact of Covid-19?

Let's start with what the impact is not. The biggest threat to the economy isn't risk of death. We have come a long way from when a few rats and a lack of sanitation could wipe out a third of Europe's population. We currently don't have great data on Covid-19, and currently reported mortality rates cannot take into account the slow onset of symptoms and lack of testing that belie much higher infection rates. In short, publicly reported mortality rates may be unrealistically high.

One real risk to the economy is through missed work. Missed work means Americans are less productive. Lower productivity means less money available for payroll and business owners. For many Americans, missed work simply means no pay. No pay means no spending, and our economy runs on spending. Even the fear of exposure to the virus may keep people out of stores, and keep their hands out of their wallets.

The impact of a productivity slowdown can be seen in China, where heightened containment measures coincided with factory slow downs for the Lunar New Year holiday. Many of those factories still sit idle as workers either cannot return or employers do not want to run the risk of infection. If China isn't producing goods, we can't buy them. In our complex economy, supply chains of all sorts cross through China at some point, affecting a broader swath than the presence of a Made in China sticker might imply.

Coal consumption as a proxy for productivity in China. The big annual dip is around the Lunar New Year.

Whenever a large amount of our effort and attention is directed away from productive activities, the economy can suffer. While stockpiling food and spending more on hand sanitizer and face masks may seem like good economic activity, not all spending is created equal. Higher value activities, such as entertainment and dining out or large, financed expenses like buying houses or cars may be curtailed by people's hesitation to venture out of the house. These have a multiplier effect that will be felt more broadly.

What can you do about Covid-19? The most important thing is to take precautions to protect yourself from infection. Keep your hands washed and away from your face. It is said that face masks do little, but avoiding areas where large numbers of people congregate may be a good idea. Be particularly mindful of your older or already compromised family, friends and neighbors. Know who might need help and who can help you if needs be. Community is always important, but you have to build it before you need it.

Prepare yourself for a time when either you are sick and cannot leave the house, or you find it a good idea to stay inside for two to four weeks. You don't need a large stockpile, but someone recommended to me just to keep an extra $50 of shelf stable groceries on hand. While rice and beans are cheap and keep well, remember, we aren't prepping for the end times, just a boring house stay. In addition to some rice and beans, I bought extra onions, garlic, spices, chocolates, tea and fruit (the man at the Chinese Grocery told me the kumquats are good for your respiratory health - I'll take that).

When the coronavirus keeps me homebound, I'll have to subsist
on rice, beans, greens and perfectly cooked medium-rare steak.

Is your portfolio ok? The initial selling was unusually sharp and short, and that can be frightening. If you are still working, earning and saving money, most equity investments are cheaper today than they were two weeks ago. Stick with the plan and keep buying as you go. If you are living out of your account, you should already have a large portion of bonds and cash to support your withdrawals despite the volatility of the market. It may be a good time to reassess your portfolio if you have not recently, but we still expect stocks to rise over long time periods. We craft portfolios to take advantage of the growth of equities, but manage for the risk that they decline.

As always, keep cash on hand for your next few months expenses. Make sure you have appropriate life insurance for the primary breadwinners in your house. Invest in stocks for the long run, but keep bonds on hand for stability over the next few years of income support.

If you stick with the plan, you'll be prepared for Covid-19.