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:
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:
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!
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