The Eye of the Storm?

Posted In: COVID-19 Market Update

The eyewall, the area surrounding the calm center, of a hurricane is the most powerful and damaging part of such a storm.  When the center of a storm hits land, it often brings catastrophic force. That’s why it makes sense to be prepared and seek shelter during a storm.

 

We are in the midst of a global economic storm precipitated by COVID-19, and the dark clouds of uncertainty are surrounding every aspect of life around world.

 

The airline and travel industries have come to a grinding halt. Entertainment companies and restaurants are either shut down or operating at far less capacity (limited hours or take-out options only). A barrel of oil has now become cheaper than a fine bottle of wine. And we have no sports to distract ourselves.

 

Amidst all of this uncertainty, the stock markets have been hit, perhaps hardest of all.  The U.S. stock market “fear index” – the Chicago Board Options Exchange’s Volatility Index (“VIX”) closed at 82.69 yesterday, the highest mark on record! This reading was even greater than during the peak of the 2008 financial crisis.

 

The world has never witnessed such widespread shutdowns and quarantines other than during times of war.  At this point, the markets have already priced in a recession (remember that the markets are leading indicators of what is expected to come).  A recession, by definition, is two consecutive quarters of negative GDP growth. This is a likely scenario, but anything better than that means the market guessing today was incorrect and faster recovery will follow.

 

As businesses shut down, there will be economic fallout. Just like when a hurricane hits, it often leaves a path of damage behind. The impact for business will be lower revenues, with no real reprieve in expenses. In order words, far less profits and slower growth!

 

However, the White House is seeking a stimulus package worth anywhere between $850 billion to greater than $1 trillion as a way to counteract some of this storm damage. Think of this as business interruption money to help those who are feeling the greatest impact.

 

An administration official said the package could include:

  • $500 billion to $550 billion in direct payments or tax cuts
  • $200 billion to $300 billion in small business assistance
  • $50 billion to $100 billion in airline and industry relief
  • And potentially $250 billion of the package could go toward making direct payments to Americans

The Administration is trying to get emergency funds into Americans’ pockets “immediately” in order to help soften the blow.

 

The proposed combination of tax rebates, payroll tax cuts, employee retention credits, small business loans and industry-specific relief for hard-hit sectors could provide some shelter.

 

These payments will help:

  • Support business investment
  • Provide cash flow assistance to help small and medium-sized business to stay in business and keep their employees in jobs
  • Target support for the most severely affected sectors, regions and communities
  • Provide household stimulus payments that will benefit the wider economy

During times of great uncertainty also come times of great opportunity.  As Americans potentially get more money in their pockets, there are a few areas that could potentially benefit.

 

We like companies that provide essential services. Think waste management, utilities, food and consumer staples companies, and health care. We will keep our eyes on those companies with strong pricing power, those that have the ability to put free cash flow to work, and those with the potential to grow their dividends. These types of companies should provide shelter in this storm.

 

You may be scared to invest right now, but we expect this storm to pass sooner rather than later.  Remember the market is a leading indicator.  It will trend up before the economy recovers.

 

Whether you are ready to add new money or not, now is not a time to abandon long-term investment plans. For those who are looking to either buy or sell stocks now, we suggest continuing to dollar-cost-average into and out of the market.  The storm clouds will lift soon enough and the sun will shine again!

 

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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