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Written by: Scott Colyer | Advisors Asset Management - AAM
We have seen this movie before and here is what it taught us.
It seems daily, if not hourly, the global panic surrounding the COVID-19 virus is spiking. Fear has gripped our world and has seemingly taken over. The virus is not the problem, the fear of the virus is the problem. This is a classic case of perception becoming reality. Every time a conference is canceled, or a restaurant is closed, that business is gone and so is the revenue that business needs to survive. The recession that everyone has been fearing is here. We will see a dive in global GDP for at least Q1 (1st quarter) and Q2 of 2020. However, we have been to this movie before and we know how it ends – and it might actually have a happy ending.
The movie took place 102 years ago in the third year of World War I. The year was 1918 and Europe was mired in a long war that had inflicted incredibly heavy human casualties for all countries involved. For the United States, it did not enter the war until April 1917 when we began in earnest to send troops to Europe as well as ramp up production of weapons and artillery. For financial markets, they were moving lower in 1917 after the Declaration of War was signed into law by President Woodrow Wilson. By January an influenza virus named the “Spanish Flu” began to make its way across Europe. Unfortunately, back then, not much was known about infectious diseases and little was being done to effectively slow it down. The virus came to the United States around March 1918, carried home by soldiers from the battlefield. The infection rate was estimated to be 27% of the world’s population – meaning 500 million people out of the world’s population of roughly 1.8 billion at that time contracted the Spanish Flu. Of that amount, estimates of 17 million to 50 million people died. The medical facilities in the United States were overwhelmed. A short recession ensued for the United States later that year.
As 1918 pressed forward a very odd thing happened: the financial markets began to heal faster than the people. The Dow Jones Industrial Average (then 20 stocks) began to rise and continued that rise through 1919. Note the chart of the Dow that follows. The markets began to see the end of the flu epidemic and WWI long before the doctors and soldiers did. As the temperatures warmed, the virus began to fade. This is exactly what we need to be looking for today.
Our financial markets have crumbled based on the coronavirus panic and financial breakage that has ensued. People have lost complete sight of reality and what is the likely outcome. We believe the likely outcome is NOT that the virus will infect one-quarter of the 7.8 billion humans on this earth, nor will this virus kill 10% of those who contract it. The reality is that this virus and its panic will dissipate as quickly as it materializes. The problem is not the virus, it is the hysteria the virus has caused.
What will turnaround this situation?
- The Federal Reserve (Fed) is highly engaged and is using all of its tools to flood the markets with liquidity.
- Public panic should have the positive effect of getting our dysfunctional Washington government to move quickly to pass legislation providing cash injections into industries, like airlines, that will need immediate help. Tax relief and other assistance for individuals is now likely a no brainer.
- As our pharmaceutical and medical industries apply their collective efforts to find a therapeutic drug and vaccine, the odds favor relief sooner than later. The markets will likely see the coming resolution long before the people see it.
What to do now?
History is very clear: for most investors, stay invested and do not panic. Current business conditions are very difficult, but we believe that is about to change. As this crisis passes, business conditions should be optimized. Global central banks may be engaging in monetary stimulus in record amounts. Fiscal stimulus, which seemed impossible just a month ago, should occur in very short time. Finally, everyone will be getting a pass on the swoon to earnings and GDP due to the virus.
So, the reality is that pandemics tend to send markets down very rapidly. Economic recessions that ensue tend to be very short and the economy tends to recover quickly. Markets have also tended to recover very quickly, as the situation begins to heal. Generally, the move has occurred long before the cure for the virus and panic have been found. The world has seen this movie before, and we may know how it ends. We believe the severity of coronavirus is nothing close to the 1918 Spanish Flu. The panic level is extreme, but both will pass. It is always darkest just before the dawn. The end will likely surprise many, in a good way!