One of the questions on everyone’s mind is, “What will the coronavirus mean for my investments?” By the time this article is printed, we’ll know more about how the financial markets are reacting to the global spread of the COVID-19 virus. As I’m writing this on March 18, I realize many of you are feeling anxious as markets are moving sharply lower, but no one really knows the extent this will play out in the market and how it will ultimately affect your investment portfolio.
You may be worried about the virus, and rightfully so. The virus has a direct economic impact because businesses, organizations and individuals are increasingly not working, staying home and limiting human contact. This has a clear and direct impact on both the supply and demand sides of the global economy. Potential travel limits, factory closings and school closures impact the supply side – the ability of economies to produce goods and services is reduced. Fewer trips to malls, restaurants, and sporting events impact the demand side and result in lower consumer spending. Sharp stock market drops also contribute to lower consumer demand as household wealth is impacted.
The stock market is a forward-looking mechanism. In other words, investors buy stocks in anticipation of what the economy and corporate earnings will look like in the future. With COVID-19 clearly going to have an impact, stocks have suffered sharp losses as it remains too early (as I write this in mid-March) to see the full effect that it will have on the economy and how businesses will react to it.
Looking forward, have we seen the end of this market selloff? No one knows the answer to this question, and it is a very fluid situation. We do believe that more stock market weakness is possible as companies get a clearer view of the impact of the virus and start to reduce their outlooks. As businesses reduce their sales and profit expectations, stock prices could fall lower.
While there is a clear risk to stocks in the near-term, we do see some reasons for optimism. First of all, areas that were initially inflicted, such as China, have already begun to see a slow but positive return to normalcy as businesses start up again and workers come back to their jobs. Second, coming into the emergence of COVID-19 in the U.S., the domestic economy was in a good place given strength around the consumer, the housing market and the services industry. Third, the combination of the severe drop in oil prices caused by the price war between Saudi Arabia and Russia along with the sharp drop in interest rates should be a boon for you and me, the consumer. When some normalcy returns to the U.S. after the virus dissipates, as it has done in China and South Korea, $30 oil prices and near-zero interest rates are essentially a tax cut for the American consumer.
Lastly, and most importantly, similar to what other nations have done, we do expect some additional economic stimulus out of Washington that would improve investor optimism. At the time of this writing in mid-March the Trump administration is discussing a plan that could amount to as much as $1.2 trillion in spending. According to Bloomberg, Treasury Secretary Steven Mnuchin pitched $250 billion in checks to be sent at the end of April, with a second set of checks to bring the total up to $500 billion four weeks later if there’s still a national emergency.
We’ve already seen the government enact some measures that include giving the Small Business Administration authority to issue loans to small businesses affected by the virus, and the Treasury Department will defer tax payment, without interest or penalties, to certain affected individuals and businesses. Although we don’t know what the final stimulus plan will look like just yet, we expect it could possibly include payroll tax relief and targeted financial relief to the most-affected industries (such as travel, hospitality and leisure).
The current market volatility will remain with us for the foreseeable future. We are focusing on potential actions in two areas – what is being done to reduce the spread of the COVID-19 and what fiscal stimulus measures are being enacted to reduce the economic uncertainty caused by it. Since you cannot predict when, or if, these will occur, it highlights an important and time-tested strategy that you should follow – a diversified and well-balanced investment portfolio can help mitigate the difficult market days.
At the writing of this article, we’re experiencing a volatile market, and it’s important to be diversified by not having too much risk exposure to one asset class or security. Focusing on long-term risk and return objectives is important as you want to stay on course and focus on the things you can control in your portfolio. It is in times like this that you can find solace in an investment portfolio built on the “red money, green money” framework that I’ve mentioned before, where the investments providing for your daily needs are protected from such market downturns. I refer to these investments as green money, because it’s safe and always there. Red money is the money in the market that pays for all the extras in retirement. It can be susceptible to some market volatility, but since you have the green money providing your essentials, it can make weathering this kind of uncertainty more palatable.
Jason LaBarge, Financial Advisor and Managing Partner at Premier Planning Group, 115 West Street, Suite 400 Annapolis, MD 21401 443-847-2531 www.jasonlabarge.com.
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