Investing, money and stock markets during a national emergency (e.g. coronavirus crisis COVID-19)

Investing, money and stock markets during a national emergency (e.g. coronavirus crisis), COVID-19, stock markets, financial crisis

It is March 2020, the coronavirus (COVID-19) pandemic is the “scariest bug” on all the media, and most of us are already “imprisoned at home” due to the national emergency quarantine state, declared in many countries across the globe. And of course, it’s not only the healthcare. The major collapse on all the markets has been unprecedented for years. In the mid of March, as measured by most of the indices and markets (e.g. S&P 500) the financial and stock exchange markets officially entered a “bear market” state. In other words, the stock markets have now fallen 20% or more since their recent all-time highs.

Most of the investors have panicked, due to the financial uncertainty, so we have gathered leading economists' opinions to answer the question “What to do with your investments during national emergency crises?”, like the one followed the recent coronavirus (COVID-19) global outbreak.

Joachim Klement (Investment strategist, a trustee of the CFA Institute’s Research Foundation and formerly head of strategy research at UBS Wealth Management), gives the simplest possible answer for most of the investors:
“Just, don’t look at your portfolio. The idea is - nothing that happens today, tomorrow or over the rest of 2020 will matter after 10 years. That “is the most important rule in bear markets. The best way to invest for most investors is to become a “buy and hold investor”. In other words, the best strategy is to buy a well-diversified portfolio that meets the needs of the investor and then stick to it for a very long time, through the ups and downs of the market. At the same time, the investors should avoid getting distracted by short-term market moves.”

The only sensible alternative, Joachim Klement mentions, is to use a highly sophisticated mathematical system. Such a system would support investors in getting out of the market and getting back in. One such respected and popular one, is the trading rule popularized by Cambria Investments’ Mebane Faber. The general advice there is selling stocks as soon as they fall below their 200-day moving average, and not buying them again until they rise back above that level.

“And with the coronavirus emergency state, following that rule,” according to Klement, “would not be possible. As the indices fell decisively below the 200-day average many days ago. Selling now leads in a steep loss in equities and other assets, as nobody can say if markets will go up or down from here (short-term), so investors will realize past losses, and not be in the market for a while. And this will inevitably mean missing the bottom of the market and will get back into the market at a stage when a lot of the recovery has already passed.”

So, he concludes, there is only one sensible option – do not look and don’t worry too much.

The same opinion comes from Jim Paulsen (chief investment strategist at the Leuthold Group):
“I think what we need somebody to calm us down, like our mom and dad tell us it’s going to be OK.” He implies that we should not panic and rush into reckless actions, and just have faith the markets will recover after the coronavirus crisis.

Gita Gopinath, IMF chief economists, opinion:
“It was hard to predict what might happen. The pandemic did not look like a normal recession. Data from China has shown a much steeper drop in services than a normal downturn would predict. There’s not an easy answer” Ms Gopinath continued, adding: “There should be a transitory shock if there is an aggressive policy response that can stop it, morphing into a major financial crisis.”

Gita Gopinath also concluded - there is no reason why the economic effects of a health crisis should linger, in the way that long periods of slow growth have tended to follow financial crises, as households and companies work off their debts.

Kenneth Rogoff (Harvard University professor, (predecessor at the IMF)) said:
“A global recession seems baked in a cake at this point with odds over 90%”

Maurice Obstfeld (professor at University of California, Berkeley) opinion:
“Recent events were a wicked cocktail for the global growth. I do not see how, given the events in China, Europe, and the US, you are not going to see a severe slowdown across the globe.”

Raghuram Rajan (professor at Chicago Booth School of Business and a former Indian central bank governor), opinion:
“The depth of any economic hit would depend on the authorities’ success in containing the pandemic, which he hoped would be decisive and rapid. Anything prolonged creates more stress for the system.”

“Long outbreak could also lead to a second round of consequences, where workers were dismissed and there was another fall in demand, eroding long-term confidence,” he warned. “These kinds of effects — companies closing down — depend on how prolonged the first round is, and what steps we all take to alleviate that first round. It is up in the air”

Olivier Blanchard (senior, at the Peterson Institute) opinion:
“There was no question in my mind that [global economic] growth will be negative for the first six months of 2020. The second half would depend on when peak infection was reached, he said, adding that his “own guess” was that this period would probably be negative as well.”

Other representatives of the IMF said that the impact of the virus will be “significant” and that growth in 2020 will be lower than in 2019, which was 2.9%.

Erik Nielsen (chief economist of Italy’s UniCredit) noted
“Four consecutive quarters of negative global growth followed the 2008 financial crisis,” but mentioned he expected “the impact of coronavirus to last only a couple of quarters.” But he also predicted that the quarterly fall could be as deep as the 3.2% contraction that the global economy experienced in the first quarter of 2009.

Gilles Moec (chief economist at French insurer Axa) mentioned
“Trying to plot the disruption from the virus was almost impossible. Our forecasting models are not set up to deal with this scenario.”

Other economists were also clear that the economic effects of coronavirus will be serious. Vítor Constancio (former vice-president of the European Central Bank), said:
“The recession is coming from a demand deficiency and the disturbance on the supply chains. The most affected sectors will be leisure amenities, tourism, travel, transportation, energy, financials.”. Vitor, also added: “It is possible that banks’ risk aversion and lack of market liquidity for bond issuance may affect credit and provoke liquidity squeezes.”

We also included the answers of three major questions, coming from financial online groups and boards:

1. How much longer are the stock markets going to decline? How great is the decline going to be?

No one knows, and that’s part of the fear that is feeding the markets to go even lower, sinking into an official “bear market.” The key is how long will this health crisis last? How many people will be impacted? And how quickly can the economy bounce back? Right now, no one has enough data to answer those questions, so the market is pricing in the worst-case scenario. What pretty much every economist and Wall Street type We’ve spoken to has said is:
“The US and the affected countries should do a two-week shutdown, similar to Italy. It will be painful. And it will require government help for people not working and businesses really hurt. But the hope is that would stop the flow of COVID-19 and boost confidence in the government’s response to this crisis.”

2. How worried should we be?

The United States is in a bear market, and it’s almost certain Q2 will be negative growth. The question is whether the United States will go into a recession (two consecutive quarters of negative growth). The reason there is such high concern on Wall Street today is investors don’t think the government response is sufficient — from Congress or the White House. A list of worries includes the coronavirus spread, oil price war, and the inadequate government response. So, the key in the coming days is whether Congress can set aside partisanship and pass a fiscal stimulus bill and whether the White House and Congress can backstop the health system sufficiently to start halting the spread of the virus.

3. What market segments will be most likely to weather the uncertainty we are seeing now? The prediction is for people to keep using their mobile phones and online services, whereas cruise ships will take a while to come back, right?

That’s correct. This is the Clorox and Netflix economy right now. The other somewhat surprising winner in all of this is real estate. Mortgage and refinance applications are through the roof. The 30-year fixed-rate hit an all-time low of 3.29 percent, so housing and home-related stocks and parts of the economy are likely to do well. I was just talking to a roofer. His business is down this week, but he’s got a lot of people calling and telling him they want him at their place as soon as this health crisis subsides.

As a final statement – the investors need nerves of steel during the coronavirus-provoked-crisis. The short-term effects of the COVID-19 crisis on the economy can’t yet be measured but are likely to be severe. Nevertheless, worrying too much could lead to a weakening of the immune system, so we advise you to stay on the positive side, be safe and stay at home until the coronavirus provoked crisis is under control and the virus is no longer a threat.