In mid-January, I began to see tweets from people in my business related to a Corona Virus outbreak in Wuhan China. Most of them came from a hedge fund manager who, in 2006, saw the housing and credit crisis coming and made billions of dollars for his clients. He had been on a rant since November about the uprising in Hong Kong (justifiably so) and based on what I was reading from him and others, it appeared there had been some sort of transmission of a corona virus from an animal in a “wet market”. I wasn’t sure what a wet market was (or a corona virus for that matter) but I kind of figured it out. I had no idea this even existed in the world’s second largest economy.
A week or so later, I began seeing posts saying this didn’t come from the wet market but might have come from a lab in Wuhan. This was backed up online with news articles alleging doctors were suddenly disappearing for speaking out and supposed screen shots of job postings in Wuhan for scientists who would study corona virus’ in bats. Then I started seeing stories that to said it originated in a covert weapons lab and had been released purposely by the Chinese government. I’m not given to conspiracy theories so this last one was a “bridge too far”, but I’m not convinced it came from a wet market either.
Around this time, it began looking like the wheels were starting to come off in China. What really got my attention was when the Chinese President was quoted as saying “the situation was grave”. GRAVE?! Whoa wait, I thought this was just the flu! Then I began seeing pictures of medical workers in full hazmat suits. Again, whoa, hazmat suits? For the flu? Wait a minute, where did this come from? We know where things went from there.
But the U.S. Stock Market, (as represented by the S&P 500) was still on a tear. We were experiencing the best market and economy in history, there was virtually no unemployment and profits were still growing, albeit at a slower pace. Then, in mid-February we hit a wall. And we all know what happens when we hit a wall… there’s damage, in this case potentially a lot of damage.
So, since this is my third, “once in a lifetime” bear market recession as an advisor and portfolio manager, I thought I would offer my take.
First, they’ve all been different and caused by different reasons. In the 2000 to 2003 decline, (prior to 911), stocks were simply overpriced and had to revert to their mean eventually if profits weren’t there to support prices. Remember the “tech wreck”. Then the attacks and a full-blown recession exacerbated the decline.
2008 was a credit crisis which grew out of another overpriced asset, our homes. I’ve heard it said that 2008 was a financial crisis that caused an economic crisis and now in 2020 we have a health crisis that has become a somewhat self-imposed economic crisis, that the government is trying to not let become a financial crisis. On top of that, what about the speed of the drop and the volatility. Huge up and down days have become normal not to mention the worst part, massive record setting unemployment.
As I’m writing this (April 8th) I believe the Federal Reserve has likely taken a depression off the table. Like in 2008, some will argue The Fed has overreached and will create an even bigger problem down the road (and you may be right). But I’m convinced, as I was in 08, soup lines were in our future if Paulson and Bernanke had not taken the action they took.
Here’s the thing about depressions, if our economy shrinks by say… 10%, (which would be less than many forecasts for just the second quarter) we will only need 11% to get back to even. But if it shrinks by 50% over several quarters, which was and may still be entirely possible, we will need 100% growth to get back to even! In other words, we would need to double the size of our economy just to get back to where we were (by the way, the same math applies to your portfolio).
The other issue is that bad actors in the world tend to act out when countries like the U.S. are hobbled. Let’s not forget that China and Russia have asserted themselves substantially more since 2008 and WWI and WWII started after depressions. I believe this scenario would have been devastating and markets would have lost 70% to 80% of their value. But potentially worse than that, our very existence as a nation could have been at risk.
There’s no doubt we’re already in recession. The only question is how deep and how long. Is it going to be a garden variety recession where equity values fall 35%? Or is it going to be at least as severe as 2008 and they fall 50%. I’m not entirely sure, but my gut tells me it’s going to be the latter with a longer U-shaped recovery. Let’s hope I’m wrong.
Looking forward, one of the questions being raised is if Americans will go back to what they were doing before; eating out, going to concerts and movies, etc. I was encouraged by what I saw in Wuhan yesterday as they opened the city and people flooded back into the streets.
As far as I’m concerned, I may need to wear a mask, but I’m going out!
Michael P Henderson, CFP® CKA®
CERTIFIED FINANCIAL PLANNER™ practitioner
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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