Covid-19 Economic Shock ➡ What comes next

While we are not technically in a recession until there have been 2 consecutive quarters of slower than usual or shrinking growth, many believe we are in fact at the end of a very long bull market. More than that, covid-19 can be characterized as a black swan - an unexpected, hard to predict event, outside the normal range of possibility, that will cause a severe contraction in the global economy.

Some economists are projecting a "V-shaped" correction - a sharp decline followed by a quick recovery. While prior epidemics - SARS, H3N2, H2N2, and the Spanish flu - were all "V-shaped", no one can say for certain how this will play out given the unique circumstances associated with covid-19.

The two simultaneous shocks that resulted from the covid-19 pandemic.

A demand shock is when the demand for a good or service increases or decreases suddenly.

After 9/11, people abruptly gave up airline travel out of fear of another attack. Covid-19's demand shock is more severe as it spans all sectors and all levels of wealth. Even people that have money are either quarantined or are practicing social distancing and withdrawing from everything - not just airline travel.

A supply shock is when the supply for a product or service increases or decreases suddenly.

Covid-19 shut down most factories in China and beyond, leaving overseas orders unfilled. Just as China is getting back on its feet, Italy, France, the U.S., and others are canceling orders now that the crisis is at their doorstep. Saudi Arabia also launched an oil price war with Russia around the same time which dropped oil prices like a dead weight when demand was simultaneously dropping due to the increased travel restrictions.

The 2 tools that will be used to get the economy back on track.

Tool #1: Fiscal policy, which relates to government spending and taxation.

Put cash in your wallet.

Washington passed a stimulus bill that is sending one check for $1,200 to each taxpayer and $500 per child. Single filers that earn $75K or less ($150K for married filing jointly) will receive the entire check. Then there is a phase-out, with the benefit being eliminated completely for those with adjusted gross incomes (AGI) of $99K for single ($198K married filing jointly). Unemployment benefits will also be expanded in terms of time, money, and eligibility (gig workers, such as Uber drivers, will now receive benefits).

Instill confidence in the healthcare system.

The stimulus bill includes $100B for health care providers and another $16B for protective gear and supplies. The bill requires all private insurance plans to cover covid-19 treatments and vaccine and makes all coronavirus tests free.

Tool #2: Monetary policy is dictated by central banks, such as the Federal Reserve.

Interest rates have been cut.

When interest rates are cut, the hope is that consumers and businesses will borrow more freely and invest the money - stimulating economic activity. That didn't help this time around because rates were already at record lows before covid-19 hit.

Liquidity is being injected into the system.

During market contractions, everything seizes up. Companies of all sizes are facing a cash flow crunch right now and need to borrow money to continue their operations. The central bank unveiled a plan on March 24th to purchase hundreds of billions of dollars of government bonds from banks. This will give banks more cash to lend to businesses. Non-traditional lines of credit for small to mid-size businesses (think restaurants and bars destroyed due to social distancing) have also been opened up since these businesses cannot secure loans from traditional sources.

What will we learn from the covid-19 pandemic?

Industries slow to the virtual revolution got a wake-up call.

Believe it or not, I know financial advisory firms that shunned working remotely up until March 2020. Can you imagine attempting to figure out secure and effective collaboration without already having tools like Zoom and Slack in place in the midst of a crashing financial market? Online learning through schools also fell flat. Covid-19 has created a shift in thinking. While people prefer seeing each other face to face, virtual has to be an option that is used routinely to ensure minimal disruption during a crisis. Things that were deemed impossible to be virtual, such as online voting and telemedicine, will hopefully gain momentum and solidify a role in the future.

Diversity in supply chains

Centralized supply chains are at risk whether it is due to pandemics, climate change, or political turmoil. China made half of the world’s masks before the covid-19 outbreak, and began hoarding most of its inventory afterward. Investors need to consider the strength and diversity of supply chains given the enormous impact it has on a company, like Apple, when it comes to performance and the ability to deliver goods during black swan events.

Health insurance and paid leave.

We don't live in a protected bubble. If the person bagging our groceries does not have health insurance and is living paycheck to paycheck, they will not take off of work when they are sick, infecting countless others. This pandemic has exposed fissures in the U.S. healthcare system. While countries with a national health system, like Italy, are still suffering tremendously, the crisis has crystallized the fact that the health of others impacts all of us.

How will your thinking change after covid-19?

This time isn't different despite what the headlines say. While there are always different nuances and lessons learned associated with each economic shock and recession, the long-term prognosis is the same - the markets and the economy will recover. That doesn't mean you should keep your head in the sand.

Invest with long-term sustainability in mind.

Environmental, social, and governance (ESG) index funds have performed better than their traditional counterparts during this correction. When the dust settles, the companies that treat their employees better will have an easier time getting them back when the economy picks up again. Look at Marriott - they have been hard hit and furloughed a large part of their workforce, meaning the workers were forced to take unpaid leave for a specified period of time, but their CEO returned his entire salary for this year.

This isn't the first global disruption and it won't be the last. The next will most certainly be related to climate change and we know it is coming. Put your money with the companies that are willing to invest in resiliency today - by taking better care of their employees or by preparing their supply chains for extreme weather events - so they can outperform in the future.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors. Follow her on Twitter.