The coronavirus outbreak has been increasingly weighing on us as we worry about our loved ones’ health. We lack knowledge about COVID-19 and its transmission. Credible reports say that most cases are mild but 15%-20% of cases fall into the very serious to severe illnesses. Those suspected of having the virus need to be quarantined for 14 days. This is an important measure to prevent spread along with other CDC recommendations.
All of this is leading to disruptions. Reports of tockpiling supplies of surgical masks, hand sanitizers, and nonperishables along with price gouging are disconcerting. Our financial markets have been significantly volatile with the DJIA rising and falling of over 1,000 points in a couple of days. Clearly, we are bracing for elevated risks to US and global economies, jobs and our investments. Daily, we are hearing about school closings, cancellations of conferences, and trade shows. Some companies in urban areas are allowing their employees to work remotely or move to suburban office campuses.
How DoesThis Outbreak Affect You And Your Money? 7 Takeaways:
1. The Economic Impact Is Real
We are quickly seeing behavioral changes by consumers in response to headlines. After enjoying a long recovery post-Great Recession and low unemployment, economic uncertainty appears to be moving toward a downturn or recession. As the virus outbreak became more visible in the states, we wrote about the need to better understand economy, market volatility, potential Fed action and how to lessen risks which you can read here. Is the coronavirus a new black swan event? A Black swan theory refers to a surprise event with a major effect. Some think so.
We don’t yet know how troublesome this virus will become. Companies have been reducing their near-term earnings forecasts, largely associated with their businesses. However, they do not yet have visibility into the longer impact on their companies’ growth. Employees quarantined or illnesses will affect supply. It seems more and more likely there will be shocks to supply and demand from households and businesses, leading to potential job losses.
2. Fed Took Action At First Emergency Meeting Since 2008
This week, the Fed cut rates by half of 1%, bringing down the fed funds rate to 1%-1.25% to contain the impact from COVID-19. It was the Fed’s first emergency meeting and biggest rate cuts since the recession in 2008. It is not yet at the lowest fed funds rate which was near zero, having been reduced from over 5%. Lower interest rates influenced by the Fed typically stimulate the economy, helping to drive up consumer spending.
The Fed wanted to send a reassuring signal that they are being proactive. That’s good news but initially it is not clear how much they can do for demand in the near term. Are we likely to be thinking about buying a house or car when worrying about the virus? The COVID-19 is an exogenous variable we haven’t experienced recently.
Other Tools The Fed Can Use
There are more tools available to the Fed in their toolbox. They can reduce rates further though they have less room now to bring them down. They will likely increase their purchasing Treasury securities from banks who will get more liquidity. Some have postulated that the Fed could consider purchasing other securities like municipal bonds or equity securities. That may need require Congressional action. Fed buying of Treasury securities are typical but their yields are miniscule given high demand for safer instruments
3. Take Measures To Stay Healthy
Follow precautions to lessen the risks of contracting the virus. Easier said then done, especially when we lead busy lives and have children who bring tons of germs home regularly. Preparing for the COVID 19 becomes necessary as families travel and gather together for upcoming holidays as reflected in this post by A Dime Saved.
4. Emergency Funds And Emergency Measures
If you have an emergency fund for unforeseen events, coronavirus would be one such event to use this if your job or hours became endangered due to being quarantined or being ill. If you don’t have an emergency fund or are living paycheck-to-paycheck, there may be increased measures for people impacted by this virus. Some states are requiring employers to provide increased hours for sick leave. Cigna was the first insurer in the US to say they would cover coronvirus testing at no charges to patients and waiving co-pays. Others will, no doubt, follow suit. CDC also offering free testing to patients upon doctor’s orders.
Make sure you can pay for your monthly living costs first. Those costs are mortgage, maintenance or rent, utilities (including phones), groceries, and health needs.
Small businesses are at great risk from slowdowns either because of supply chain problems or reduced demand or sick. Congress is adding more resources and will likely put emergency loans in place to ease the risk for households, especially those most vulnerable.
It may be hard to put away money for emergencies in this kind of market. However, you may be surprised to find that you are going out less to restaurants, concerts, sporting events and cutting down on overseas trips. If so, consider using some of this money to set up an emergency fund. It is never too late to start.
5. Review Your 529 Savings And Retirement Saving Accounts
You probably noticed a sharp drop if you even dared to look. It may get worse before your accounts look better. If you have a long term horizon before your children are going to college or you are going retiring, do little or even nothing. Remember that if you take money out of these accounts that you are counting for later on, you will lose future compounding benefits and maybe even have to pay penalties for early withdrawal and taxes.
You may want to check on the mix of your securities. Rebalancing should be done annually as you age. Typically, the younger you are the more risk tolerance you have for equity securities which are of higher risk and provide higher returns than money markets or bonds. You have more years to weather storms like these.
On the other hand, if you are near retirement, your portfolio should already be shifting into more bonds relative to stocks. Check your 529 savings or retirement accounts to see if you have put your money into target rate funds which adjust accordingly by age of holder or recipient. Resist withdrawing unless you have an emergency. It is hard to replace these dollars.
Don’t Stop Adding To Your Accounts Unless You Have To
Your 529 and retirement savings accounts are tax-advantaged which are different than your taxable investment accounts. As such, you can lessen your taxes for investment accounts by using a buy-hold strategy. By holding stocks for at least one year and one day, you will pay taxes at the capital gains rate capped at 20%. This is more tax-efficient than short term trading which is taxed at an ordinary income tax rate. While you may benefit from tax efficiencies, investment accounts are taxable, not tax-advantaged as retirement accounts. Dollars invested into your 401K account come from your pay-check, are tax-deferred, thus reducing your taxes for that year.
Remember to continue to add to retirement accounts regularly. Make sure there are regular withdrawals from your paycheck to your employer-sponsored 401K account. Increase your contribution when you get raises or bonuses so you can earn your company’s contributed match, if offered. Employer matching of your 401K contributions means the company may contribute 50 cents on the dollar up to 6% of your salary each year you contribute. The more you contribute up to the cap, the more you receive in the match. Make sure to contribute to your Roth IRA account to the max.
6. Should You Sell Your Stocks During Downturns?
During the recession, on October 16, 2008, Warren Buffett (we are huge fans of Buffett as you may have already noticed) said,
“Let me be clear on one point. I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Wouldn’t we all want to know if Warren Buffett is adding to his portfolio currently? Rest assured the optimisic Buffett will be dipping in at some point if stocks trend downward. We recently reviewed his latest letter to his Berkshire Hathaway stockholders. The company is sitting on a rather large cash pile he was hoping to use for elephant-sized acquisition. The company searches for bargains.
Does an economic downturn mean you should sell stocks? Not necessarily if you have a long term strategy. Financial markets go through corrections, bull and bear markets. Selling during economic downturns provide actual rather than unrealized losses. Many times that is the worse time to sell your securities. That said, when stocks do go up, it is a good idea to at least trim some of your holdings in these kind of markets if your risk intolerant.
Take a look at our stock indices from peak to trough during the great recession:
Dates S&P 500 DJIA NASDAQ
10/09/07-Peak $1,565.15 $14,164.53 $2,803. 91
03/09/09-Trough $ 676.53 $ 6,547.05 $1,268.64
Percentage % -56.8% -53.78% -54.75%
By mid May, the S&P 500 was up 30%, rising over 60% by year-end 2009. Although you can’t pick the exact bottom of the markets, you can go bargain shopping for stocks that have undergone corrections or are in bear territory. For example, tech stocks have been strong leaders in the market but corrected during US-China on-off trade talks (remember that?) and now with supply chain disruption that begain with China’s virus outbreak.
Investors have been seeking stocks to hedge the coronavirus outbreak. Some of those names—Teladoc Heath, Veeva Systems, Clorox, Zoom, Gilead, Moderna–have been strong performers as investors pick these winners. However, these stocks may have moved up too quickly so check to see if they are trading at rich valuations or wait for pullbacks. Its always worthwhile to have some gold and defensive stocks that pay above average dividends in your portfolio. Look at GLD ETFs or Vanguard Dividend Appreciation ETF which are known for having more stable stocks in the portfolio.
Current indicators point to a weakening sentiment:
- Gold is at seven year highs.
- Utilities are at near all time records.
- 10 year and 30 year Treasuries are sporting all time low yields.
- Mortgages are at an 8 year Low
7. Lower Borrowing Rates May Spur Consumer Spending As Virus Fears Ease
With mortgage rates at their lowest rates in eight years, don’t wait until the virus outbreak goes away to use them. Consider refinancing your loan if you can get a healthy drop in your rate. If you have been paying your bills on time, your credit may have been improved which will further improve your refinancing abilities.
While you may not be going house or car hunting now, low interest rates are appealing when you are borrowing. Mortgages are at their lowest rate in years. If you have been in the market shopping for a car, you may also reap some benefits. Student loan rates may drop as well. Interest rates on credit cards are not likely to go down much. However, we may be using them more to avoid handling germ laden dollar bills. If so, make sure to pay your balances in full and on time. Use your credit cards for convenience, not for a borrowing machine.
You can’t control the COVID-19, it is here for the foreseeable future. Hopefully, it will be a distance memory very soon. First, take care of yourself. It may be a painful time money-wise for you. Try not to panic if you don’t need your money right away. However, if you do need liquidity, use your emergency funds for essential living costs. If you aren’t liquid because you are losing hours at work, seek out corporate or government programs for healthcare costs or emergency loans that have been emerging in recent weeks.
Review your savings and investment accounts and see if you need to rebalance your porfolio. This should be done annually regardless. If you have a long term horizon don’t sell stocks recklessly. Heed Warren Buffett’s words. Those with money needs like college loans or retiring may be tempted to sell but consider the tradeoffs such as withdrawal penalties.
How are you faring during this stressful time? I wish you and your family good health and safety from the virus. How are you preparing. If you are an investor, how do you lessen your risks? Thank you for reading! Consider subscribing to our blog and get some freebies and our weekly newsletter. We would love to hear from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.