Market Thoughts – March 24, 2020

Not all bear markets are created equal and this one is no exception. Work stoppages, state lockdowns and a reduction in personal spending due to the coronavirus have already begun to affect the economy in unprecedented ways. To make matters worse, it’s unclear how long this will last. While controlling the spread of the coronavirus is the primary focus, markets are worried about the collateral damage to companies. 

A company’s ability to weather an economic downturn is often related to the amount of debt it has. For those with very little debt, there are fewer reasons the company might need to shut down. For companies with lots of debt, a slowdown could tip it into bankruptcy. If the economy slows down and sales fall, those companies must be able to cut costs to the point where they can still make their debt payments. This is the crux of the concern in markets today – whether many companies will be able to continue to make their debt payments. 

This concept applies to personal finance as well. The strength of an individual’s balance sheet can be the difference between high-profile athletes that go bankrupt and middle-class workers that successfully save for retirement. Fortunately, although certain areas of debt such as student loans have increased for Americans, the average household balance sheet is still strong. Household net worth has almost doubled since the expansion began in 2009 (Federal Reserve). This is not to say that many Americans won’t face difficulties – last week’s jump in initial jobless claims reveals that many already need assistance.

Thankfully, the US has learned many lessons from 2008. Due to the incredible speed by which the coronavirus has spread, and the nature of the economic slowdown, the government is pulling out all the stops in order to support individuals and businesses. Officials are using their 2008 playbooks with far larger numbers and a faster response. The Fed has now pledged open-ended asset purchases (dubbed “QE infinity”) after pushing rates to zero, while the Senate is seeking to pass a “Virus Rescue Package.” Tax payment deadlines have been pushed back. Many industries, especially in travel and hospitality, will likely receive government assistance to get through this troubling period.

Bear markets are often the result of recessions and can be prolonged if those recessions are caused by over-indebted businesses and individuals. However, recoveries often occur swiftly and when investors least expect it. In the end, it’s important to understand that eventually the economy will get back to work. This has already happened in China and parts of the world that faced the coronavirus earlier. The question will be how many companies avoid financial distress during this period and whether government stimulus will help others bridge that gap.

For individuals, avoiding investment mistakes depends on having a sound financial plan and the discipline to stay the course during what are admittedly gut-wrenching daily market moves. In the meantime, it’s important for everyone to stay safe and to tackle the public health crisis together so that we can get everyone back to work as soon as possible.