COVID-19: The Impact on the Economy – Is The Worst Over?
As economies across the world try to jump-start their way to a "V-shaped" recovery, the question on the lips of many investors and analysts is, "has the worst of the economic damage passed?"
As economies across the world try to jump-start their way to a “V-shaped” recovery, the question on the lips of many investors and analysts is, “has the worst of the economic damage passed?” Without the benefit of hindsight, it’s a difficult task to make any predictions with any certainty given how turbulent stocks, commodities, and currencies have been over the last few weeks.
However, we can make a start by assessing what we already know before using it to form a solid foundation to try and establish what may happen over the coming weeks and months.
The Economic Impact of COVID-19: What We Know So Far
The damage to the economy that COVID-19 has inflicted on the world’s economy has already been well-documented. In the US, unemployment hit record levels at 14.7%, whereas the S&P 500 only took 22 trading days to fall 30% from its record high reached on February 19.
According to data from Bank of America Securities, that’s the fastest drop of this magnitude in history. To give that drop some further context, the second, third, and fourth quickest 30% pullbacks all occurred during the Great Depression era in 1934, 1931, and 1929, respectively. Such was the magnitude of the immediate economic fall out of the coronavirus outbreak.
Markets across the board have since recovered, with the S&P 500 regaining most of those losses within 90 days. So is everything starting to look a little rosier? Unfortunately not. The worst is yet to come.
Why the Worst is Yet to Come
As mentioned, it’s impossible to predict the future, so let’s build our assumptions on facts. The problem is for the US; the facts are pretty damning. In June, 30% of Americans missed their house payment. Worse still, 30 million Americans will lose $600 of unemployment benefit come the start of August.
Even when the number of cases starts to recede (they’re still growing exponentially in many states), without a vaccine or viable treatment, consumers will avoid any activities that could increase their risk of contracting the virus. Top of that list of activities is travel. Therefore, airlines, hotels, casinos, and travel operators will be severely impacted for many years to come. Many may need government bailouts just to survive.
Their failure will have a knock-on effect on oil prices (which are already at rock-bottom), which in turn affects the banks financing these high-debt operations. Insurance companies are also on the brink after paying considerable sums to a vast number of businesses that have been forced to close under stay-at-home orders.
With the Federal Reserve printing money to stimulate economic recovery, inflation will start to rise, wiping value off savings everywhere. It could be one of the reasons why the stock market continues to increase in value, in expectation of this eventuality.
Are There Any Opportunities?
The old saying “never waste a crisis” still holds as true for the events of 2020 as it has ever done. For those with the available capital, there will be opportunities to make intelligent investments and acquisitions.
Just as was the case in 2008, there will be an increase in home evictions for those who miss too many mortgage payments. Experts have predicted that there will be as many as 50,000 in New York City alone. With excess housing stock, prices will undoubtedly fall, presenting an opportunity for those with the resources to snap up below-value properties and achieve impressive rental yields.
Similarly, there will also be opportunities in the stock market. However, many investors have gone too early. With the economic impact yet to really bite, many have looked at stock prices with huge dividend yields and low P/E ratios without factoring that revenues will plummet in Q2 earnings reports, possibly falling even further in Q3 depending on the sector of the company in question as the virus continues to creep back into our lives.
By basing assumptions on 2019 data, they’ve likely made a huge mistake by taking a long position during the rally. Now is the time to sit on the sidelines as the market comes back down to better reflect reality. When that happens, it’s those with strong balance sheets that are going to be the stocks to target. In harsh economic conditions, only the most resilient survive. Companies with high debt-to-income ratios will be first on the chopping block as banks will look to take a tighter grip of extended credit lines.
Time to Watch and Wait
Unfortunately, it looks as though we are only at the end of the beginning when it comes to the economic impact of the virus. By the day, a “V-shaped” recovery looks less and less likely, with a “W” far more probable. However, I fear it could be worse. When the Q2 results are drip-fed to us over the next couple of weeks, we’ll have a much clearer picture. But until then, it’s time to watch and wait.