We Are All in This Together
Image by Fernando Cobelo for United Nations Global Call Out To Creatives
March 19, 2020
Dear Friends and Colleagues,
There certainly is a lot to digest and adjust to these days. We are all experiencing the many ways this virus has upended life. Our intention with this note is to provide some commentary on how we see the way forward through this significant disruption in the economy and your investments.
The big elephant in the room is the question of whether there will be a recession resulting from this and, if yes, what are the steps we should take. Our response is ‘yes’. It is now virtually certain that the economy will experience a relatively brief, but significant decline in activity. The current estimates range up to a 2.5% annualized decline in the gross domestic output (GDP) for the second quarter (April through June) and possibly improving into the 3rd and 4th quarters.
A major ‘unknown’ is when the spread of the virus will peak. The national response right now, through ‘social distancing’, is to expand the amount of time it takes for the virus to spread, thereby potentially reducing both the numbers infected and the stress on the medical services for those who will require hospitalization. While this is a positive for the containment and medical management of the virus, this could likely lengthen the time where we will experience the decline in economic activity and the potential effects on the financial markets.
The numbers of new virus cases needs to start diminishing before the seeds of confidence can sprout. Once it becomes clear that an end is in sight, most likely through the effects of ‘social distancing’, newly introduced treatments and a potential vaccine emerging from a very engaged bio-tech industry, it will be easier to assess the present and likely future economic consequences. At that point we will have a more reliable appraisal of how the earnings for US and global companies will rebound and begin generating increased market values for U.S. companies. As they have historically, increasing equity values may begin several months in advance of the actual earnings improvement, leading to the higher valuations that the markets make possible.
We fully expect the U.S. and global economies to recover and expand from this very difficult and challenging, but temporary, situation. The current and anticipated economic responses by the government, both monetary (Federal Reserve Bank) and fiscal (from Congress), are analogous to ‘suspended animation’ for the most deeply affected businesses in the country such as entertainment, leisure, hospitality and travel. These industries have very large numbers of employees (estimates in the double digit millions) who will suffer as a result of the ‘social distancing’ containment measures. Unemployment estimates by JP Morgan are that the unemployment rate, which before the spread of the virus began was 3.5%, the lowest in 50 years, may rise to at least 6.5% before the rate of contagion plateaus. The net effect of the government programs being enacted now, on those and other industries, is to maintain their viability as the recession comes to an end. This should allow for a more rapid recovery of business activity in these sectors. This has been described by economists as a ‘U-shaped’ recovery, which is one where things drop rapidly, remain depressed for a short period and then recover rapidly.
Our advice is to remain invested with the allocation designed to meet your specific goals. There may be opportunities where we will propose to individual clients, tactical adjustments designed to take advantage of specific sectors of the economy during the recovery. These will be recommended on an individual basis.
We recognize that 2020 is the year of the virus. We also anticipate that 2021 will be the year of the recovery.
We are all in this together and look forward to our continuing conversation. Should you have any questions or insights, please be in touch.
In the practice of social distancing, we wish you good health and good wealth.
Jerry, Bernard, Kim, Eileen, Colleen
P.S. Our main office is fully and securely operational, as are our remote locations. Currently, we are primarily working from our respective home offices. The Albany office is presently staffed on a daily basis by Jerry, who is in Albany for the next month. Kim and Eileen rotate physically to the office as needed. All calls to the office can be fielded in any of our locations.
