Capital Investment Advisors

Overview of the Last Few Weeks in America & 3 Things Investors Need to Remember

In just a short time, America has been hit by two “black swans” – events that have a severe negative impact on our economic wellbeing. These deadly birds consist of a crash in oil prices and the COVID-19 pandemic. There’s no overstating how much damage these events have done to the country.

The stock market is roiling and keeps hitting record lows. A recent crude oil price war between Saudi Arabia and Russia carried massive economic implications. And, we’ve all now been affected by the Coronavirus (COVID-19) pandemic; Americans are practicing social distancing and self-quarantine. The reality of the outbreak and potential spread has led to “March Sadness” – the cancellation of large events and smaller gatherings across the country.

Our country is, along with numerous others across the globe, in the grips of COVID-19. People are isolating themselves as a protective measure. When they do go out for supplies for self-quarantine, they often find the grocery stores devoid of necessary items.

This has completely overshadowed news of an oil price crash, a development that would have otherwise dominated both headlines and economic decision-making. The price of crude oil fell 30% in one day due to the Saudi Arabia-Russia price war – and Saudi Arabia’s decision to open its petroleum floodgate.

With these two black swans, on Monday March 16th, we had a 3000-point market drop, making that the worst spiral since 1987. Just a few days before, the market had tumbled to the worst downturn since the same year, so we’re rewriting the same headline on a different day. This most recent dive was the death knell for the bull market that began 11 years ago this month.

The question underlying all of these disasters is how we get through them.

We Americans are responding to these black swan events as we always do in challenging times. We are coming together.

We will make it to better times together.

Today, I want to walk through three key topics to provide guidance and information – and hope. Our current troubles won’t last forever, my friends.

Right now, we live in a world of necessary social isolation.

The idea of quarantine isn’t new. The process dates back to the 1400s and is derived from the Italian “quarantino.” Sailors were required to stay aboard their ships for 40 days before coming back on land. This practice was to ensure they wouldn’t bring any foreign diseases to the mainland population. Quarantines have been used countless times in the past 600 years because they work.

A freak 2019 event in Seattle provided evidence that social distancing and self-quarantine can slow the spread of disease. The city, known for its constant rain, got pounded with an unexpected 20 inches of snow in just nine days. Schools closed for a full week. People stayed inside and didn’t gather.

This calamity presented a comprehensive study for virologists and epidemiologists. Did the way Seattle was forced to respond to its snowpocalypse reduce the incidence of viruses associated with winter?

The answer was a resounding yes. Researchers found a significant drop in the cases of flu. Noticeable dips were present for multiple other viruses, like respiratory syncytial virus and rhinovirus.

We know now too that, in addition to quarantine, social distancing works – it “flattens the curve” – or reduces the cases – of people who will contract COVID-19 over time. A study from the Institute of Disease Modeling shows that a 75% reduction in social contact could mean a COVID-19 case reduction of over 90%. Part of the model they used for their study came from the Seattle Flu study.

Alongside these tried-and-true methods of managing the outbreak come some uncomfortable realities. This is a time of economic shutdown and economic dislocation, and, with the market down 30%, it officially means a bear market has reared its ugly head.

This is a frightening place to be for investors and companies alike unless you have a solid “bridge of dry powder.”

With large pieces of the American economy closing, there is an imminent hardship for many industries and their employees. The bonds and/or cash you hold (your “dry powder”) allow you to bridge the gap; to get you through the difficult times when the stock market craters. To be clear, this doesn’t mean your portfolio won’t decrease in value. But your dry powder will give you a financial bridge while the stock market is struggling.

For those that don’t have dry powder in their portfolios, there’s a massive fiscal bridge coming from our administration.

The newly enacted Families First Coronavirus Response Act (HR 6201) Act gives government agencies $100 billion to fight COVID-19 and the associated economic disruption. The money will be used to expand free COVID-19 testing and to increase reserves in unemployment insurance, Medicaid funding and emergency family and sick leave.

What we’re also seeing is a public-private partnership between our government and companies like CVS, Walgreens, Walmart, Target, LabCorp, Quest Diagnostics, Roche and home health companies. The goal is to get as many people tested for COVID-19 as possible.

The Federal Reserve has dropped interest rates to 0% and made $700 billion available for liquidity, and another $60 billion to buy bonds.

All of these measures are in hopes of calming the market.

And there’s likely to be a phase-two fiscal response from Capitol Hill. Secretary Mnuchin has called for $1.2 trillion in stimulus to support small business loans and to provide for stabilization funds and direct cash to Americans. What could be up next would be a leisure stimulus – to help airlines, cruise ship and hotel companies.

And finally, let’s talk about recovery.

Before we talk about the good stuff, let’s imagine the worst-case scenario. This situation, from the data I’ve seen, seems to be the contraction of COVID-19 by between 20% to 40% of Americans. But remember, the 99.5% who have the virus will survive, thereby granting us “herd immunity.” This term refers to these individuals’ resulting immunity to COVID-19 through their prior illness.

If countless people get COVID-19 in the next month, say one to two million Americans, these newly immune may re-enter the workforce and say to hell with quarantine.

Meanwhile, a vaccine is already making its way through trials. Pharmaceutical company Roche is starting Phase III trials of Actemra, a rheumatoid arthritis medication, as a potential candidate. Treatments for COVID-19 are also in the development phase.

The better-than-awful news is that, with panic washing over markets, investors seem to be taking a near worst-case view. How is this good? If things turn out even slightly better than investor’s fear, then the market will start to rebound.

The fiscal stimulus will provide a buoy for at-risk people for the next month or two, and by that time, our social distancing and quarantine lifestyle will have begun to loosen up.

Remember, this is America. We will get through this. That’s who we are.

Markets recover because America recovers. Americans, with our remarkable resilience and unparalleled economic system, overcome every single problem and challenge we face.

Previous ArticleNext Article