Advising clients for 35 years provides the ability to contrast the effects of past economic scares with the present, Coronavirus. I cannot speak regarding health concerns, infection rates, or other epidemiological issues, that is best left to our medical community. I do, however, feel it appropriate to speak about the economic and market impact. Although some may deem it cold and callous to speak about wealth and money in relation to an infectious disease that has taken many lives and likely many more to come, I believe it necessary to review the potential economic and market impact and to discuss client’s financial concerns.
To understand the potential economic and market impact of this outbreak, we can review past events that impacted the markets and global economy, then draw parallels with the current issue. Two that come to mind are the Y2K scare and the dot-com bubble. Although neither event was health related, I think each provides a narrative whose outcomes may be insightful. To recall, the Y2K scare centered on our computer scientist’s discovery of a fatal flaw in the code running programs of everything from our financial system, to our transportation infrastructure, to utilities. The programs were written without a differentiation between millennia and as the clock ticked to January 1, 2000 all programs would read January 1, 1900, with calamitous results. For upwards of 12 months all attention was drawn to this issue and industry, government and consumers repaired the old and bought new in an effort to avoid catastrophe. Whether the issue was overblown, the attention paid corrected the problems, or, more likely, a combination of the two, the Y2K scare turned out a non-event. As the clock ticked the year 2000, few material issues arose, the World was once again “safe.”
The dot-com bubble of the late 1990’s was an entirely different animal. With the acceptance of computers and the internet by consumers, an entirely new industry developed centered on a “new paradigm”. The world as previously known was “gone” and a new reality emerging. It was said that this new reality offered wealth for the taking and those in on the first floor would reap unimaginable gains. Investors were told the world had changed and that long held economic and financial rules for investing no longer applied. It was different this time. Although this technological revolution did live up to the hype for many of those creating the companies and bringing the companies’ stock to market, most individual investors were late to the game, investing only after companies had appreciated dramatically in value and just in time for the “bubble” to burst, leaving many financial accounts decimated. When all was said and done, the world was different, however, the rules governing economics and finance didn’t change.
This latest crisis is certainly different from both the Y2K scare and the dot-com bubble, but take-aways remain. Although there is expected world-wide economic repercussions resulting from this virus, the extent of the impact is unknown, the duration uncertain, and inevitable changes to society unclear. Can our health care professionals devise or discover effective treatments for this virus until a vaccine is developed and ready for mass dissemination? Will the infection rate decline due to warmer weather or as preventive measures (such as quarantines) are implemented? How many are currently infected and what’s the actual mortality rate? These and many more “known-unknowns” can incite panic in the markets and in our behavior. Are the markets and pundits overreacting as in the run up to the dot-com bubble? We do not know the answers to these and many other questions. However, we do know many things. Going into this crisis, our financial systems appear solid, our economy in excellent shape, and consumers flush as joblessness remains low. Both political parties have now accepted and appear ready to ramp up a fiscal response as we have seen with the $8+ billion bills passed by both the House and Senate and signed into law by the President. Fiscal policy will potentially offset the inability of monetary policy to provide economic relief. Fed Policy (monetary policy) may currently be ineffective due to both the Fed’s inability to reduce rates dramatically from record low levels and because our current economic issues are supply side (monetary policy is most effective in ramping up demand). We do expect economic conditions to worsen over the next several quarters but believe the virus’ economic impact may be short-lived. Markets are currently moving lower, however, we do not believe companies will be impacted to the extent that internet companies were impacted by the dot-com bubble.
We strongly advise adhering to your Investment Policy Statement as your best defense in a falling market and to combat economic malaise. Please call us with any concerns, to discuss your personal situation, or simply to further discuss our strategies and outlook.
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