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Is America Taking A (Super)power Nap?

testing for COVID-19 at Pennsylvania Department of Health Bureau of Laboratories (detail).
Microbiologist Kerry Pollard performs a manual extraction of the coronavirus inside the extraction lab at the Pennsylvania Department of Health Bureau of Laboratories. Photo courtesy Pennsylvania Governor Tom Wolf.

This week has been full of anxiety and uncertainty for Americans and others worldwide. Some of that uncertainty is due to public health concerns, but many people are also worried about the long-term economic impact of the newly classified pandemic.

It isn’t clear yet that we will have a “recession,” since the classic definition is consecutive quarters of declining gross domestic product. So far, the main impacts in the U.S. have arrived near the end of the first quarter and will spill into at least the first weeks of the second. Will it be enough to statistically cause the Recession of 2020? Maybe.

Either way, there is no doubt that for most people the next few weeks or months are going to feel like a recession, albeit a strange sort we’ve never seen before. For people in the most affected industries – travel, entertainment, restaurants and probably education – it will seem like a full-on depression. On the other hand, a lot of medical professionals and delivery drivers are already wondering when they will get their next decent night’s sleep.

Ronald Reagan once said that a recession is when your neighbor loses his job, and a depression is when you lose yours. The number of people for whom the coming weeks and months will feel like a depression is significant.

Washington will offer some form of tax and other financial relief, aimed broadly, although whether it will be something like a payroll tax holiday is in question. There will be more relief targeting people who lose their jobs because of cutbacks or business shutdowns, and those confined by quarantine orders. That still leaves a lot of people who can technically go to work but have little chance to make money. A waitress who relies on tips won’t benefit much from working if there are no customers.

Colleges are closing classrooms and dormitories. I suspect we will soon see extended vacations and temporary closures (measured in weeks, not days) in K-12 schools that are not directly touched by the virus, besides the existing closures for schools with verified or potential exposure. This is a step policymakers don’t want to take because of the burden it places on working parents. But it is almost sure to come in places that have significant outbreaks, and probably others too.

As was the case with the financial crisis, the key to a quick economic recovery will be to keep otherwise healthy enterprises from succumbing to the shock of a sudden business downturn or mandatory shutdown. There will be some sort of disaster-lending program targeting them. On Wednesday, President Donald Trump proposed $50 billion in lending through the Small Business Administration, which makes loans via guarantees to financial institutions. We are likely to see other specific steps to help airlines, cruise lines and hotels, and maybe some related industries too.

Will these measures work? They could, but only if they can deliver help quickly enough and widely enough. It takes months for agencies to disburse similar types of aid after natural disasters. Here, the losses suffered by the genuinely needy won’t be as readily distinguished from those of people who are in less distress, or those of people who just want to take advantage wherever they can.

But if we can keep healthy businesses from going down for the next month or two, the strict measures we’ve begun to take will start to show results within a few weeks. China, with 1.4 billion people, on Wednesday reported just 15 new cases, with only one – one – that seemed to have been acquired locally by someone outside Wuhan. The U.S. won’t have to lock down cities or states to achieve the same result. I don’t think we have to stop air travel altogether, though the crowds at many boarding gate areas are a problem. But voluntarily or otherwise, almost all other sorts of public gatherings are likely to be restricted in most places very soon. There will probably be further travel restrictions beyond those imposed on the Schengen Zone this week, too, to keep new infections from arriving from future global hot spots.

In the background of all this, many labs all over the world are racing to develop short-term therapies based on the immune responses of coronavirus survivors. They are also working on a prophylactic vaccine that will take longer to test, produce and deliver. We are probably looking at months, at least, before these developments have a big impact in the field. But the mere announcement of large-scale clinical trials likely will be a shot in the arm for the stock markets.

At Palisades Hudson, our broader investing advice hasn’t changed at all. Although we can’t foresee events like this, prudent long-term asset management builds in the assumption that such events will come. COVID-19 and the novel coronavirus that causes it will have major effects, and potentially life-changing ones on an individual level. But long-term investors should remain calm about the state of their portfolios. Action for the sake of action is seldom productive.

For now, Americans and their government should focus on how to help businesses and individuals weather the storm. Meanwhile, we can take sensible measures to keep ourselves and our loved ones as safe as we can.

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