Friday, March 20, 2020

My 7th Update on the Coronavirus and Its Impact Upon the Economy and Your Investment Portfolio

Dear Clients, Students, Colleagues, Friends, and Family:

One of the best articles I’ve read about the potential impact of the Coronovirus, and explaining why “social distancing” is an imperative, is from the Washington Post, and I highly commend that you read it at this time:

As the article notes, the Coronavirus is likely to be with us for the next 15 months, possibly longer. It will likely peak in May (perhaps later in some parts of the country), resurge in the Fall, and resurge again in the winter of 2020-21. 
  • The article’s basis for these peaks in large part due to the experience with the Spanish flu outbreak in 1918.
  • Note that some viruses become less transmissible as temperatures and humidity rise in the summer months. But we simply don’t have the evidence on the Coronavirus to know if this will be the case here. In fact, since Singapore - which has a warm and humid climate - has seen significant spread of the virus, it just may be that the Coronavirus is too contagious, and too few people are currently immune, for seasonality to play much of a factor in the Summer of 2020. But let’s hope otherwise.
  • As the article also points out - to prevent overwhelming our health care system (which would dramatically increase mortality rates), we need to “FLATTEN THE CURVE.” That means “social distancing” - staying at home if possible, limiting visits to the store (use home delivery where possible, or pick-up outside a store for stores that offer same).
What is not known, however, are answers to these questions - that may well determine the impact on how we all live and work, and how severe the U.S. and world economy is impacted over the course of the next year.
  • How long does the coronavirus linger in the air? The Coronavirus spreads when an infected person coughs or sneezes, expelling droplets into the air. What is not known is how long those droplets remain in the air. This may well determine how far apart we must stay from each other, and whether we can walk through retail stores (at a safe distance from each other).
    • The weight of the evidence suggests that the new coronavirus can exist as an aerosol — a physics term meaning a liquid or solid (the virus) suspended in a gas (like air) — only under very limited conditions, and that this transmission route is not driving the pandemic.
    • Higher humidity levels, such as those that occur during summer months, likely lead to less possibility that the virus will stay in the air.
    • Currently, it appears that the risk of infection is low, unless we are near someone who then coughs or sneezes into the air. Or if we touch surfaces that contain the droplets.
  • Can those who have had the Coronavirus become reinfected? This is a question with big implications. If those who have been infected are highly, highly unlike to become reinfected (at least for a year or longer), then those persons could return to normal activities. Also, the Coronavirus spread would slow, if a significant part of the population has already been infected.
    • One study done on monkeys suggests that immediate reinfection, after the monkeys got better, does not occur.
    • Early observations from China are promising, but more research is needed.
  • Can those under age 20 become seriously ill, or die from the disease? (Yes!) We do know that children who have contracted the disease don’t appear to get severely ill. However, some research suggests that a small percentage of them will have severe illnesses, especially those children with other health conditions (including asthma). 
    • Children in China with COVID-19 showed less severe symptoms than adults, but infants and toddlers were vulnerable to moderate and severe infection, according to a new study in the medical journal Pediatrics.
    • 6% of the cases involving children were severe, and there was one death.
    • For cases involving children less than 1 year old, unfortunately 11% of those cases were severe and/or critical.
    • The percentage of children with severe illness was one-third of the percentage of adults with severe illness.
    • The morality rate for those ages 20-30 might be only 0.1% to 0.2%. But, to put that in perspective, that is 1 in 500, to 1 in 1000. If the 17,000 students at Western Kentucky University were all to get the Coronavirus, that means 17 to 34 might die from the disease. (And that’s why universities have moved to online classes!)
  • Will testing be greatly expanded, and become simpler and faster?
    • In the United States, just 4,000 tests were being done a day, as of March 14th (the latest date for all of the available data).
    • Testing kits are not yet being produced in sufficient quantities. The main problem appears to be a lack of the “reagent” - a chemical used in the testing process.
    • Large scale testing is needed to verify who has already had the coronavirus. (Which determines whether those persons can return to work, as noted above.)
    • New tests are being developed. And existing tests are being scaled up.
    • But it will likely be a couple of more weeks, here in the U.S., before testing of all those with current symptoms can occur. And weeks after that before testing becomes available to confirm those who have had the Coronavirus already.
  • When will a vaccine be ready? Will the vaccine be effective? Will medicines exist to lessen the severity of the disease?
    • Health experts are suggesting that it may be Summer 2021 - 15 months from now - or longer, before a vaccine becomes available.
    • Treatments for the Coronavirus - i.e., medicines that lessen the severity of the illness - are far more likely to become available soon.
    • We simply don’t know, at present. There is a great deal of speculation about medicines, vaccines, in the media.
      • Some “Class I trials” of vaccines are already underway. (Class 1 trials determine whether the vaccine is safe enough to move to Class 2 trials, which then measure effectiveness.) Vaccine development and testing takes time.
      • Some medications already on the market will likely be “repurposed” to aid in easing symptoms of the Coronavirus. But too little is known, at present, as to how well the current medications on the market (for other conditions) will work when applied to the Coronavirus.
      • New medications for treatment of Coronavirus symptoms will be developed, but this will take more time than re-purposing existing medicines.
Answers to these questions will affect the future of the U.S. and global economy.

Just trying to “think this through,” here are some possibilities:

(These are just possibilities, and reflect a lot of speculation on my part.)

Some areas of the economy - food production, pharmaceuticals, food delivery - will do well. Other portions of the economy - travel, hospitality, and entertainment industries as extreme examples - will likely suffer for long periods of time.

Other types of businesses will have to adjust - and adjust quickly, in order to survive.

For example, as more research is known on how long the virus can linger in the air, after someone sneezes or coughs, and as research reveals if those previously infected are unlikely to be reinfected anytime soon, some adjustments by restaurants and retail stores can be undertaken.

Here are some possible outcomes, over the course of the next 15 months or longer. (Please note, a lot of this is speculation on my part!)
  • Workers who have already had the Coronavirus, and who are confirmed to have had it, become more valuable to companies.
  • Restaurants may re-open, but perhaps only serve patrons at half their capacity. Tables will be separated by 6 feet or more from each other.
  • Large social gatherings - Broadway shows, concerts, sporting events - will not occur. But some professional sports may re-emerge to be played, but with the audience only via television.
  • Universities and colleges will likely stay online during the 2020-21 academic year.
    • There is simply too much risk in putting 20-40 (or more) students in a classroom.
    • Some colleges may seek to recruit students who have previously had the disease, for on-campus (and residential) instruction. But this will vary by major, as a sufficient cohort of students may exist.
  • K-12 education will change and adapt.
    • Students who have had the disease might be permitted to return to school, for in-person instruction, once testing verification has been submitted to the school.
    • Home schooling will become much more widespread. Perhaps in small groups of students, such as 5-8 students. And perhaps taught by teachers.
      • If so, the demand for high school, middle school, and elementary school teachers could soar. Enough so that credentialing standards for teachers might be relaxed. 
  • Retail stores (other than groceries / pharmacies, which remain open now) will begin to reopen. But perhaps “by appointment” - or with a limited number of persons permitted in each store.
    • Online sales by small stores will proliferate.
    • “Shop local” calls will become more intense, to prop up small businesses.
  • Airlines, hotels, and other travel-oriented businesses will suffer far-reaching and long-term consequences. Very long large-term infusions of cash into large corporations, such as airlines, will occur via loans or preferred stock.
  • For the next year, those able to work from home will do so. Again, if those previously infected are not susceptible to re-infection, some offices may be staffed.
  • Employment in transport of goods - home delivery, for example - increases (as it has) and maintains higher levels for at least a year.
  • Landlords, faced with those unable to pay rent (or all of their rent), will face difficult choices. 
  • Municipalities (states, cities, towns) will need U.S. government support, through transfer payments, as government revenues plunge due to lower tax receipts.
    • Forward-thinking municipalities will issue long-term debt, as quickly as possible, to take advantage of historic low interest rates on municipal bonds. The sooner the municipalities act, the better. (Are you listening - WKU?
    • A lot of currently outstanding “callable” municipal bonds will be called and refinanced.
    • This will actually strengthen state finances in the years ahead, as debt burdens will be lower due to lower interest rates on debt.
  • Congress is drafting a huge, trillion-dollar economic stimulus. Much more will be needed in the months ahead.
    • Direct payments to some taxpayers will occur. But the “fairness” of these will be questioned. And some fraud will occur.
    • Long-term, very-low-interest loans to businesses will occur, sometimes backed by U.S. government guarantees. These loans will likely be originated through local banks.
    • Unemployment compensation payments will be extended, far beyond the current maximum for receipt of benefits.
    • Still, unemployment will surge. Some economists are predicting unemployment rates of 20% (close to the 25% estimated unemployment rates of the Great Depression).
How Does This Affect My Investment Portfolio?

You may think, from my economic predictions above, that the sky is falling. It is not. As I stated, these are just predictions. What actually occurs in the economy is subject to a wide variety of factors.

The U.S. stock market is currently, by my estimates, close to “reasonable values” (compared to historic valuation metrics). Large cap growth stocks remain overvalued, while small cap value stocks are undervalued (although companies that are smaller are more susceptible to bankruptcy, should a severe economic crisis occurs).

Some financial advisors and pundits are stating that the market is “cheap now.” I don’t concur. The U.S. stock market, overall, was significantly overvalued when all this started, near the beginning of the years.

If you are working, continue to fund your 401(k), 403(b) or other retirement plan accounts. You are now buying securities at less expensive levels. This bodes well for you, over the long term.

If you are retired, your anxiety level about your investments is likely quite high, as there is a “threat” to your nest egg. Yet, if you possess an appropriate strategic asset allocation (as my clients do), and an investment policy statement that sets forth a plan for rebalancing, then stick to the plan. Certainly, if you have questions, discuss things with your financial / investment adviser. But, history demonstrates that long-term investors do well, following a strategic asset allocation with targeted rebalancing.

More to come, after Congress passes its third (and most significant) package to address the impact of the Coronavirus. I expect it will be enacted sometime next week.
As always, if you have questions or concerns, please feel free to contact me.
Thank you.
Ron A. Rhoades, JD, CFP
Personal Financial Advisor
Scholar Financial
 Email (preferred): (clients and prospective clients) (students and others)
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