Wade A. McFee Comments
First, I do not believe the depth of the Coronavirus Pandemic can be measured in terms of the suffering and deaths we have and continue to will face. This is truly a difficult time and our thoughts and prayers remain with families suffering during this historic Pandemic and job dislocation.
Today, I’d like to review what I believe are The Four Stages of the Global Recession and Pandemic and how we plan to behave in each stage.
Stage 1: In my opinion the slow down began July of 2019 with the US Federal Reserve cutting the discount rate and the S&P 500 stock index showing declining year over year earnings for its companies and business activity appeared to be slowing.
By September 2019, the Federal Reserve began adding liquidity to a troubled US Banking and financial system and cut interest rates further. By January 2020, The US Federal Reserve had added more than 1/2 Trillion dollars to the US Banking System to keep it functioning. The US economy was notably slowing coming into the first quarter of 2020.
Action: I was defensive in 2019 while the ‘stock bubble’ roared ahead with gains of 30%. I believed the Recession of 2020-2021 was already coming.
Stage 2: In the first quarter of 2020, the Global Recession arrives at the same time as the global COVID-19 Pandemic. US and global stocks plunge 35% or more from their January 2020 highs with concern rising. The US economy has effectively been closed for business as companies and governments have told everyone to just stay home.
The US Federal Reserve Bank slashes interest rates to 0% AND pledges $2 Trillion in Monetary support. The US Government passes a $2.2 Trillion ‘survival bill’ referred to as CARES.
Action: I have been trying to begin a monthly stock buying program where we buy 2% to 4% into US and global stocks each month for the next year. My belief is that sometime during the next year we will find a market bottom for stocks and bonds and a recovery into 2022 seems reasonable.
Stage 3: The Bottom. Second Quarter 2020 I believe, as does Goldman Sacs, that worldwide Gross Domestic Product may drop by 15% to 25%. That will be the largest drop including the Great Recession of 2008-2010 and the Great Depression in the 1930’s. The United States unemployment rate, which I believe already sits at 10% given the last two weeks 10 million people having filed for unemployment, will most likely peek out at 20% to 25%. That will be the greatest unemployment rate since the Great Depression of the 1930s.
Let’s also not underestimate the Trade War with China and its impact on supply chains. Let’s also not overlook The Oil Trade War between Russia and Saudi Arabia which has already driven oil prices into the low $20 barrel.
Regarding the COVID-19 virus, I wonder how fast will we find a therapy for treating people with the coronavirus? I believe a few months is necessary. How quickly can the ‘flu shot’ be developed and mass administered in the US and worldwide? Epidemiologists say 12-18 months. How tolerant will politicians and the population be in reopening the economies by reopening restaurants, theaters, sporting events and shopping malls? More importantly, how tolerant will people be of continued deaths from the COVID 19? I am thinking we won’t be quickly reopening much.
Action: I believe most financial assets will fluctuate wildly. This may provide for even more monthly buying opportunities into stocks and other risky assets for us in the months to come as is consistent with investors retirement plans and risk profile.
Stage 4: Restarting the US and global economy from COVID-19 AND the Recession. Some are optimistic that mid to late April 2020 that we will flatten the curve of deaths from the coronavirus in the United States and that the economy will start to reopen businesses. I am afraid it is wildly optimistic. I would be surprised if the economy and business’ get up and running before the fourth quarter of 2020. Then, we will need to address an aggressive Government Stimulus to get business’ going again. This should give us ample time to continue adding to equities, at a low price, over the next 3-10 months.
I believe the central issue of too much debt held by Governments, Corporations and households is only set to worsen substantially in the year ahead. Defaults in credit from Government entities like Illinois and Italy are likely. Corporate defaults from energy companies suffering from oil prices as low as $25/barrel look likely to me. Retail companies like Macy’s and Gap may be unable to continue. And Households have seen a sizable drop in net worth as both stocks and home values decline.
In my opinion Central Banks around the world will try to support Credit markets and slow defaults. But they can’t save them all. Interest rates are most likely climbing by 2023 making most bonds unattractive. Equities may be slow to recover, but trying to get a 3%-4% dividend and await a recovery seems like a reasonable way forward.
As some of you will remember in 2003, the US was recovering from the Dot Com Stock Bubble of 2000, the World Trade Center attack of 2001, and the H1N1 Pandemic 2003, I was very excited about stocks and few others were.
I am thinking that once to COVID-19 and the US Elections pass, we will be forced to deal with a pretty deep Recession. This next year may provide Cycle Investors like us to take more risks that are still prudent with our Families Retirement Plans.
While this Cycle Bottom passes, stay safe and stay healthy.
Disclosure: The information and opinions presented here are those of Wade McFee and are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions, views and information expressed in this commentary are subject to change without notice based on market conditions and other factors. You should contact your investment representative, attorney, accountant or tax advisor with regard to your individual situation.