With the unwelcome introduction of COVID-19 into the world, we have not only found ourselves in incredibly uncertain times with regards to healthcare and pandemic responses, we have also found ourselves facing economic uncertainty. This week alone, Los Angeles, New York, and San Francisco have temporarily closed all non-essential businesses. This includes film sets, bars, restaurants, gyms, salons, and so on, leaving many people temporarily out of work. It’s quite easy to feel concern for our economic future, so let’s break this down a bit shall we?
Over the last several decades there have been severe downturns in all sectors of the economy. The worst that I have experienced in my lifetime thus far, was back in 2008 which in essence was truly a depression. The banking debacle was caused by the ease of the credit market and the false valuation of the US real estate market by way of mortgage lending to unqualified borrowers with interest rates being based on inflated real estate values. I knew we were headed for a total disaster when I was getting my shoes shined by a wonderful man and he was telling me he just bought a house with 100% financing and easily qualified for a mortgage. It was later blamed on the sub-market of sub-prime mortgages. The bond traders loved having these higher than average interest rates that were touted as AA bond type with little risk. Everyone was at fault and the domino effect on every aspect of the marketplace was astronomic. After the market crashed, short sales were happening left and right and large pools of defaulted properties and defaulted loans were sold for pennies on the dollar. Loan rates dropped and the credit checks with more stringent requirements for borrowers were put back into place. A sense of normality came back into the mortgage market, while the bond traders got greedy and were left holding the bag.
Eventually, Henry Paulson, an American banker who served as the US Secretary of the Treasury was able to implement policies to save the banks in the US as a whole; while proactive investors during this time (who believed in America) were buying solid real estate or stocks in sound companies.
This crisis caused by global pandemic COVID-19, is a whole different animal entirely. By and large, the economies of the United states (and many of the economic leaders worldwide) were rolling along at such a high levels that there were really no real signs of an upcoming downturn; certainly, not an abrupt one. Who would have thought a virus would put our country (and the entire world) on its knees? No one quite knows what to do, which makes it feel debilitating. So, let’s talk about how to take advantage of this crazy downturn. Real estate for now will not, in my opinion, drop as quickly as the rest of the market. It would take more time to bring down the market to a level that would be worthwhile to pick up a bargain. Sellers largely paid too much for their properties and won’t be willing to let it slip away so quickly. There will be exceptions to this, but not in prime real estate areas. Therefore, let’s start by having a look at the stock market; the market hates uncertainty. It is my opinion that the stock market will continue dropping until a solution is in the wind, however, I believe that will happen sooner rather than later. The most important thing as a person, a neighbor, and as a potential new investor in these troubling times is going to be to stay calm. Should you be prudent, and stock up essentials? Yes. Should you obnoxiously hoard items and leave nothing for others? Of course not, and the same mindset goes for stock. Would you be comfortable if your neighbor had nothing? The world will not dramatically change, if people remain socially responsible and prudent. It is in these times of disaster, and yes, this is a global disaster, that leadership and a calm disposition is most critical.
Now, if you’re aiming to purchase stock in the downward slide (and it is my position that you should if you can), you don’t want to look back and say “wow, I could have purchased stock in Disney at $100 or less”, rather than looking at the price of stock as the sole decision making factor, look at companies that are well suited to come back quickly; the ones that have a solid balance sheet. There is great opportunity right now in the stock market. This downward slide in the market is likely to last a few weeks or months, but the market works on the future valuation of companies and once we get a handle on a direction and how to handle this virus, we are on our way back to stability.
On the macro side, we will undoubtedly see a downturn in the economy, and major economic indicators and statistics will start to trend downward. However, we will bounce back. If a simple statistic like national GDP suffer, quite frankly it is not the end of the world. Perhaps, the sector of the market which will suffer the most will be credit. With rates next to zero, bad companies have continued to borrow. Some of these companies will not survive unless there is staggering government assistance.
It is my hope that those with hourly wages, living paycheck to paycheck are given government support through programs or tax breaks. Equities on the other hand will certainly rebound. If you don’t need the money (and it’s understandable if you do), now is not the time to sell your stocks. When investing in equities you need a medium-term outlook; you are not there to pick the bottom of the market. Companies with strong balance sheets will undoubtedly survive., in fact they will thrive. Especially if we are stuck in our houses for a while, talk about pent up demand! Earnings outlooks for every company will be adjusted. Quite frankly, it’s already priced in. Now is the time to get back into the market, the rise up is often as vicious and fierce as the fall down. Stay calm, be kind, America is strong, and we will come through this.
We will come back. We always do.