A recession is a more than likely economic outcome caused by coronavirus. The swiftness of the impact of COVID-19 on our communities is unprecedented in modern times. This virus is a serious natural disaster spreading on a global scale. The virus is a pause button on our society.
Its results are not yet showing up in economic indicators. Latest figures on unemployment remain low at 3.5%. Initial claims for unemployment insurance were down. That’s because the latest indicators were largely based on February numbers, prior to the virus in the US. Unless you’re in denial, you know a recession is coming. If you are old enough you may recall how bad the economy got in 2008-2009. Fear is a justified feeling though each recession may be different as it is event-driven.
Fed Emergency Action Mirrors Efforts Taken For The Great Recession
At this writing, the Fed cut its benchmark interest rates by a full percentage point to a range of zero to 0.25%. They will also be buying at least $700 billion in Treasury and mortgage bonds. The Fed will be be joining a global coordinated effort with major central banks including Canada, England, Japan, Switzerland and the European Central Bank.
To put this in perspective, the Fed is using a near mirror image of near zero rates and quantative easing that were used during the severe 2008-2009 recession. In a relative short time, this Fed is using its power to lessen impact of virtual shutdown on our economy. We as Americans, as consumers and as the number one economy in the world have not been here before. COVID-19 is the kind of beast that has rattled our financial world. I applaud their action. However, implementation and impact will takes time.
Let’s get back to some basics.
What Is A Recession?
In its simplest terms, a recession is a decline in economic activity involving at least two consecutive quarters. The National Bureau of Economic Research or NBER defines an economic recession as a “significant decline in economic activity spread across the economy lasting more than a few months, normally visible in GDP, real income, employment, industrial production and wholesale-retail sales.”
Recessions can be mild and short like in 2001 when it lasted eight months. On the other hand, they can be more severe as the Great Recession which lasted 18 months. What typically happens during a recession is this: consumer spending drops impacting businesses. In turn, they are forced to slow or stop hiring and potentially implement layoffs. Unemployment rises and households have difficulties paying bills and their debt.
The Fed’s Monetary Policy
The Federal Reserve has moved fast to lower the fed funds rate and add liquidity into our financial system. By lowering their benchmark, they influence all interest rates. That will result in lowered rates including the business prime rate, loans for mortgages autos and colleges. They look at many economic and inflation indicators—leading, coincident, and lagging–that telegraph where we are relative to typical business cycles. Leading indicators are predictive and occur before changes in economic cycles. They include the S&P 500 index, housing permits, and initial claims of unemployment insurance.
Government And Private Actions On Paid Leave For Workers
It is not just the Fed that is moving to help consumers. On a parallel track, there have been the beginnings of coordinated actions by government with the private sector. Help is needed for their employees and those who own small businesses. Besides the desperate need for available testing, workers without access to paid leave when falling ill or hospitalized experience additional stresses. Access for workers to paid leave varies dramatically with high numbers of people not covered according this table. Large companies offer paid leave but who pays for those who do not have that benefit?
It is difficult for those living paycheck-to-paycheck to make ends meet. Without paid leave, low hourly wage workers, freelance workers and others who are not being paid for any time off when sick. Some emergency packages are being put in place for those in need. Otherwise, some who are ill may take their chances going to work so as not to lose their earnings or job. This poses a nightmare scenario of the virus spreading faster. Social distancing in communities will come at a serious cost but the virus will spread faster without it.
From Bull Market To Bear Market In A Record Time
The impact on our volatile financial markets have been felt deeper and harsher than the many of the other leading indicators. Terms like stock market crash, corrections and bear market emerged in quick succession. A stock market crash occurs when the market falls 10% from its 52 week peak in a matter of days of trading. On the other hand, a correction in the market is more gradual, with stocks falling 10% from the 52 week high typically over months. Bear markets result after a 20% decline from a 52 week level. This also happens over a number of months. The reaction in the markets to the coronavirus, once it arrived in the US from China, was rapid.
The End Of The Long Bull Market
Here’s how the stock market did in recent weeks illustrating its swift moves.The S& P 500 index used as a market proxy peaked at $3,386.15 on February 19th, declining to just $2,978.76 on February 19th in six trading days. This a 12.3% drop into solid correction territory. We officially entered a bear market on March 11th when the S&P 500 hit a low of $2,707.22 that day, closing at 2,741.38, ending a 11 year bull market.
Since World War 2, we have had 26 market corrections (not including the latest one) with recoveries taking about 4 months on average. However, if stocks go into bear territory as we are now, there is more pain and it takes more time to recover. During that same timeframe, there have been twelve bear markets averaging a decline of 30% over 14 months, taking 24 months to recover. The most severe recession was from October 2007 to March 2009, or 18 months. Stocks dropped 57% and took 4 years to recover.
When Will The Markets Bottom?
It is anyone’s guess when the markets decline will bottom. We don’t yet know the severity of the coronvirus spread or its full economic impact. Hopefully, aggressive Fed action and containment efforts by government, private sector, communities and people will work well. There has been talk of fiscal stimulus that may further soften the downturn.
Here are five possible clues as to when the stock market bottom may be close:
- The Fed will be constantly looking at economic indicators to decline, trough and stabilize to signal our recovery. They will take further action, expanding quantative easing similar to what what has been announced just today.
- Economists look to the Conference Board Leading Economic Index which is composed of 10 indicators (including the S&P 500 index) that move up or down several months before the economy.
- We can look for the number of coronavirus cases to slow outside China. China seems to be recovering. I cheered when I read that Apple Stores are reopening in China.
- We have not yet hit chaos in the US, and our virus experience follows Europe, notably in Italy which has been locked down. Coronvirus cases will climb in the US, peak and start to stabilize in the US soon. When it appears the virus is under control, it may be a good time to buy.
- Corporate buybacks return with verve. Many companies have a lot of cash but have not activated their repurchases.
You Don’t Have To Wait For A Bottom
When the markets are particularly turbulent, I have used Investor’s Business Daily. They provide charts, volumes, market upturns, downturns, and follow-through days. A follow-through day indicates a rally attempt has succeeded and the market direction has changed from a correction into a “confirmed uptrend.” It tells you to start gradually buying stocks again. Stock rises need to be accompanied by above average volume for a number of days to confirm a market uptrend.
On down days in the market, I have bought some shares to average down my cost basis. I am a long term investor, not a trader. Like most people, I have found it hard to look at my stocks on a daily basis. I don’t think we are near the bottom but who knows where that is. However, if you are going to own stocks for the long term, you can begin to add to your existing stocks or buy names that were on your previous list but may be at bargain levels.
Steps To Take To Prepare For A Recession
1. Save More, Spend Less
You may find it easier to save more during the coronavirus period. By staying closer to home, you are likely not eating out, shopping, going to the theater, concerts, sporting events or movies. True, you can order in or shop online. Use this time to cut down on spending for things that are unnecessary. Put savings to work in your emergency fund.
Make sure you are increasing your liquidity in your savings accounts or money market deposit accounts (MMDA) which are insured by the FDIC. It is not clear how long you may experience less work hours or reduced face-to-face time with clients. We wrote about how it important it is to have an emergency funds in the previous post here. Consider using some of these savings to set up an emergency fund if you don’t have one. It is never too late to start.
2. 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 you are going retiring, do little or even nothing. Keep your automatic paycheck contributions in place especially if your employer offers match contributions. That extra money is valuable and through compounding, grows faster. 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.
Unless you are facing or are about to face financial hardship, avoid drastic changes like a shift to cash especially if retirement is not imminent. Stocks which have been battered should not be sold as they have the greatest upside when it is time for the markets to recover. Bonds, especially high quality bonds like treasuries may be better places to withdraw money from. Investors flocked to these bonds for their safety, selling more risky stocks.
On the other hand, if you are near retirement, your portfolio should already be shifting into more bonds relative to stocks. Check your retirement accounts to see if you have put your money into target date funds which adjust accordingly by age of holder or recipient. Resist withdrawing unless you have an emergency. It is hard to replace these dollars.
3. Refinancing Opportunities
With mortgage rates likely to be further reduced with today’s action by the Fed, 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 and/or shorten your term. If you have been paying your bills on time, your credit may have been improved, enhancing your refinancing abilities.
The higher your credit score the better your new loan terms will be. Consider your budget and what is most appealing to you: a lower interest rate or a shorter term. A lower interest rate will reduce your monthly payments while a shorter term (from 30 year to 15 year term) may raise your monthly amount but you get rid of the loan faster.
4. Buying or Selling Your Home
The National Association of Realtors are seeing reduced home buyer traffic and that is likely to get worse before it improves. That is understandable as “Open Houses” aren’t very appealing in this environment. However, if buying a home was on your list, it is a good time to start house hunting online. The low mortgage rates will be a stimulant for buying your home once the virus is stabilized For sellers, this is a tough time, especially if you are in need of the proceeds of the sale but take some heart that demand will come
5. Paying Off Your Debt
You need to continue to reduce your debt. If you have the opportunity to refinance your mortgage or car loan you should do that now. Remember to pay your credit card balances in full each month. Simply paying the minimum requirement is not enough. Reduce your spending so you can pay your bills in full.
You may have heard that President Trump took some action related to student loans as part of emergency executive actions. He called for a waiver of your student loan interest on federally held student loans “until further notice.” Until it is seen in writing it is a bit unclear. It is not a suspension of monthly loan payments or loan forgiveness. It appears that your monthly payments will remain the same but credited towards the principal amount of your loan rather than waiving all of the interest you owe. This will likely lower the principal amount while they pause some of the interest that will be accrued during virus period. It is good but not as much as had been hoped for.
Positive Takeaways Will Emerge From COVID-19’s Wreckage
The coronavirus has had negative consequences. There are high costs for businesses and their employees not just in the cruise or travel businesses. The financial impacts are spreading to other businesses as well.
While the coronvirus has had negative consequences, here are some positives we are experiencing:
- Closing of schools and colleges have increased reliance on distance learning. Imagine no more snow days because classes will be held online.
- Time to learning new skills if you are staying home.
- Reflection time, goal setting or review your future plans.
- Heightened awareness about your communities.
- Appreciation for the businesses and institutions that you depended on that are closed now. Validate their value by shopping or visiting them when the dust clears.
- Taking more health precautions in the future when we have minor illnesses around family, friends, acquaintances, and co-workers.
- Kindness has been increasing in this tough environment. Let’s be thankful for what we have.
This too shall pass.
We have been experiencing dramatic times at lightening speed. The stock market fell into bear territory quickly, reacting to the anticipated impact on our economy and communities. The uncertain environment has been taxing in recent weeks signalling an inevitable recession. The Fed has undertaken massive emergency measures to lessen to burden on our economy that has not yet faltered. This post was designed to explain what is going as we grapple with these circumstances in our lives.
As a professor, I am rapidly redesigning my courses for students as we rely on distance learning for rest of the semester. As a mom, I will driving my kids to school to retrieve their books so that they can begin their own virtual learning experience.
This will be our new normal for awhile as many millions will do likewise. I truly wish you good health and happiness. I will continue to post as always. I am anxious to hear how you are doing! Please consider subscribing to our newsletter and our community.
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.