Covid-19: Market and Economic Concerns. What Now?

The U.S. economy is in a “self-induced” deep recession that may be short lived followed by a “U” type recovery. The “U” snapback depends on Covid-19 peaking soon and healthy workers resuming work in May. The Federal Government passed a massive $2 trillion stimulus/relief package (10% of U.S. GDP) in an effort to help consumers, small business and deeply affected larger corporations survive during the pandemic. Credit markets have stabilized after numerous Federal Reserve actions injected liquidity to prevent insolvency issues and defaults. European countries also announced large size financial stimulus packages that provide loan guarantees, deficit spending measures (including payroll tax cuts) and direct support. These stimulus/relief bills and Fed actions helped create a strong support level in the stock market, which reached its recent low on March 23rd. There is limited market upside until healthy workers return to work, and normal consumer behavior patterns return, including airline travel. This won’t happen overnight. Instead, it will gradually build as the threat of Covid-19 and fear surrounding the infection fades.

Covid-19 Update: At the time of this writing, the U.S. was running north of 200,000 cases with 4,476 deaths and a fifteen percent infection rate among those tested. Testing has really ramped up. Recovery rates are very high according the World Health Organization. The average healthy person who gets the virus might suffer a dry cough, fatigue and fever and be sidelined for a week or two, experts said. Dr. Fauci, director of the National Institute of Allergy and Infectious Diseases, announced he is starting to see “glimmers” that social distancing is helping to lessen the spread of the Covid-19 in the U.S. Social distancing, giant ramp up in testing in hotspots, rollout of effective treatments, and progress on a vaccine will bend the curve allowing healthy Americans to go back to work again. However, the case rate growth in the U.S. must slow by late April to prevent a longer lockdown period. There is a vaccine ready for FDA clinical testing next week. National social distancing guidelines have been extended until April 30th, which should slow the spread, decrease lower death rate, and help the healthcare system meet demand for services. Testing is ramping up into the hundreds of thousands each day. New testing only takes five minutes to test. GM is expected to produce tens of thousands of ventilators by month end. The U.S. Death rate is projected to peak mid-April.

What to Do? Hold equities, ignore volatility and take advantage of sell-off by dollar cost averaging into high quality dividend paying stocks while prices are low. The Volatility Index (VIX), a measure of market volatility, is projected to remain very high through April. It will take a few months for the U.S. Stock market to form a bottom. After a retest of March low, a bottom may form, and the stock market should recover to new highs over the next twelve months. Record monetary and fiscal policy, low energy prices, ultra low rates are all tailwinds for a recovery. Be patient, and focus on the long-term. Buy what has dropped in value, namely quality equities, and look forward towards a rebound in stock prices over next twelve months.