The coronavirus is not the Great Recession. The cause of the Great Recession was a financial crisis whereas the cause of the coronavirus is a biologic crisis. The “cure” for the financial crisis is not going to be the same as the “cure” for the coronavirus. The impact on the market of the Great Recession is not going to be the same impact as the coronavirus. It is best to understand the difference between the two and the difference in strategies.
The Great Recession was a financial crisis. It was essentially a worldwide burst of a credit bubble that had been building since the mid-1970s. Prior to the 1930’s Great Depression, there had been a number of crises in the United States: 1796, 1819, 1837, 1848, 1873, 1890, 1893, 1907. All were caused by credit crises. There was no FDIC guarantee of bank accounts; when a bank failed, depositors lost all the money they had left in the bank. During a recession, when there were rumors of a bank in trouble, depositors would rush to the bank to withdraw their funds. If it was one bank, that bank could borrow from others and survive the “run on the bank”. But if it was multiple banks, then it turned into a “bank panic”.
All of that changed in on June 16, 1933 with the passage of the Federal Deposit Insurance Corporation (FDIC), which guaranteed deposits up to $100,000. Individuals could be confident that they would get their money back and bank panics in the United States ceased. Or they ceased for 70+ years. Some economists who expected FDIC had resolved the bank panics called it the “Golden Age of Banking”. They said there would be no more bank panics (which we now call systemic events).
In the mid-1970s however, non-banking institutions like car dealerships, insurance companies, and industrial companies with credit departments began to handle deposits of big institutions like endowment funds, hedge funds, brokerage firms, payday lenders, and currency exchanges. These institutions were handling cash in hundreds of millions of dollars, and FDIC guarantees did not apply. When the subprime housing bubble burst, it was like a domino taking down one institution after another. The financial system melted down into a crisis.
The “cure” or response was financial Central bankers around the world began to print and push money into the system. In the United States, the Federal Reserve put billions of dollars into the individual banks to squeeze them to continue loaning money. The Federal Reserve went into the market and bought “toxic assets” by printing money. That kept those assets from default.
The result was a recovery of the financial system.
That is very different from the coronavirus. The coronavirus is biological. The Federal Reserve can send letters to banks asking them to grant tolerance to companies and individuals who miss loan payments, but beyond that, the reduction of interest rates is a psychological positive, but will not stop the spread of the coronavirus.
The coronavirus is going to have to run its course. In Seattle, there have been six deaths. Genetic researchers at Fred Hutchinson Cancer Research Center studying the genetics of the first two persons who died postulate the two were connected through community spread with an estimated 300 to 1,500 people who were infected but asymptomatic.
We have been here before. The SARS virus was passed from bats to cats to human beings. It was contained, but had to run its course. The swine flu virus jumped from pigs to humans, and, like SARS, it ran its course and died out. The coronavirus will run its course and die out. The containment methodology is similar in all these cases. Sadly, there will be more deaths and more infected people will need additional care. Eventually, there will be a vaccine. If the Fred Hutchinson research is correct, there are quite a few people who are infected but asymptomatic.
The question I posed at the beginning of this message was what will be the impact of the coronavirus on financial markets. Make no mistake, there will be an impact. Some companies and industries will be hard-hit and see a decrease in demand for their product. Some supply chains will be disrupted. Some companies will see little impact on their earnings. For me, it is important to evaluate each and every stock in portfolios to determine the impact of the virus on the individual companies.
In 2001, the Seattle area was hit with the Nisqually Earthquake. I had a 150-gallon fish tank in my office on the 23rd floor, and as the building shook, water splashed out of the tank. Thankfully no fish were ejected. The building shook and for some it was a very scary event. The impact of that earthquake on several employees continued for over a week: they walked up the 23 flights of stairs coming to work and down 23 flights when they left. They had a fear of being caught in the elevator if there was another earthquake.
It was a psychological reaction. The odds of another earthquake in the weeks following the Nisqually quake were next to zero. But that did not keep them from the fear of another ‘shaker.
I relate this because even when the coronavirus has run its course, I would guess there will be a number of people who will not fly, will avoid restaurants, will avoid big events, will not sign up for cruises. In my opinion, those industries are going to take longer to recover. Other companies will also feel the hangover psychological impact.
I doubt the market recovery will be a “V”, where the market hits a bottom and then jets back up. I would guess we will see quite a bit of volatility up and down. We do not know enough about the virus to say when it will finish its rampage. It will only be some months later that we will be able to say it is safe. It is best to assume a decline for some weeks or even months in the market in general. The best methodology for investments to weather the virus, in my opinion, is to find stocks in those companies that will either not be impacted or will be minimally impacted by the virus. I am certainly doing that for my clients.
