photo by Pixabay user amrothman
Humanity’s confrontation with the novel coronavirus and COVID-19, the flulike illness it produces, is moving into a new phase of adaptation and response, now that the containment ship has mainly sailed.
Yet financial markets, obsessing over the significant but unknowable short-term impacts on corporate profits and the global economy, have little interest in the less alarming long-term picture. This is creating some interesting opportunities for investors and households, even as we all try to adjust to the real and perceived threat that the outbreak warrants.
It is usually the case that downturns in financial markets carry the seeds of their own recovery. This one shows no sign of being an exception.
Equity markets had a choppy but overall bad week last week, despite a dramatic 50-basis-point cut by the Federal Reserve in its benchmark interest rate. The Fed’s move was followed by many other central banks around the world. The money that poured out of stocks had to go someplace. It went to investments perceived as safe havens, notably U.S. Treasury instruments.
By Friday morning, the rate on 10-year Treasury bonds fell at one point below 0.7%. It has hovered nearly continuously between 2% and 4% since the financial crisis more than a decade ago, a period in which the U.S. has consistently led the developed economies (China does not fall into this group) in economic growth and job creation. The 10-year Treasury rate plumbed these depths the same day that the February jobs report showed a powerful economy prior to the disease disruptions, with 273,000 new jobs created and unemployment falling to 3.5%.
Last week’s sharp drop in interest rates is the opposite what we would normally get with such a strong underlying economy. It creates a big opportunity for homebuyers and homeowners – especially the latter, who don’t have to venture into strange houses and deal with third parties – to borrow or refinance at almost unprecedentedly low rates.
Even if you just took out a mortgage last year, you might lock in savings of thousands of dollars per year, for many years to come, by refinancing now. That’s an economic stimulus with a delayed fuse, one that will be reflected in stock prices sometime down the road. Stock prices will also benefit when the flow of funds reverses, and investors decide that the financial sky is not falling. They will then choose to invest in a way designed to improve their real net worth, rather than the opposite. Lending money to the Treasury at less than 1% for 10 years is an almost guaranteed way to lose purchasing power after considering inflation.
Last week’s central bank and market movements mean businesses will also see their interest rates drop. This will help them get through the crisis, as long as they can cut expenses or borrow enough cash to see them through any downturn.
The effects of such a downturn are likely to vary greatly by sector. Travel, hospitality and tourism are already among the worst hit. One regional British carrier, Flybe, succumbed last week. But like most of the outbreak’s human victims, it was already compromised before the virus struck.
The heavy hit to transport-related sectors, including oil and gas, is likely to continue as long as real or potential exposure – rather than infection – results in exclusion from certain countries or demands for quarantine at home. Nobody wants to go to a concert or festival, for example, only to be forced to spend the next two weeks in confinement even if they don’t get sick.
This is why Miami, for example, postponed the Calle Ocho street fair and the huge Ultra Music Festival, both of which were scheduled for later this month. The SXSW (South by Southwest) extravaganza that brings music, film, television and technology players to Austin, Texas, was also canceled by week's end, in part due to many participants having pulled out because of corporate travel restrictions.
At some point these aggressive containment-related policies will relax, once everyone agrees that the virus is already present pretty much everywhere. Yet that point does not seem to be very close as I write this.
As badly hurt as the travel-related sectors are, other sectors like retail, domestic manufacturing (particularly for health-related supplies) and medical services are seeing spikes in demand from consumers who are preparing to hunker down or protect themselves. Keep in mind that the U.S. economy is driven mainly by consumers, produces mainly services rather than goods, and is less dependent on exports than almost any other major economy in the world. We are not immune to a global slowdown, but we are resistant to one.
The term “service sector” covers a lot of economic ground. A hairstylist or plumber can’t do much work from home; a financial planner, technology worker or attorney frequently can. People who must go to work will do so, although even in these cases some interaction may be limited. Certain medical providers are using telemedicine more extensively to keep potentially infected patients away from staff or other patients.
My own firm is an example of how businesses are responding. This is a busy time of year for us; in addition to our year-round work, we prepare tax returns for several hundred clients, almost all of whom have complex situations that make do-it-yourself or mass-market preparation undesirable. Last week I adjusted our policies to let most of our staff work from home most of the time, while keeping our offices open with personnel who are able to get to work without using mass transit. I also postponed nonessential trips between offices by our staff.
I can’t put our people in a bubble. What I can do is reduce the chance that if one person is exposed, it will have ripple effects across our firm. Many other companies – especially larger ones than ours – implemented similar measures around the same time I did. We are trying to protect our employees and our businesses as best we can.
Meanwhile, the rate of new infections in China has slowed, and more than half of those who have been sick are already well. Manufacturing and shipping can begin to return to normal. Eventually, this will benefit the rest of the world, as supply chain disruptions ease. In the long term, corporate managers will be more careful about diversifying their sourcing, a trend that was already at work before the new coronavirus emerged due to trade frictions.
Led by an $8.3 billion package that Congress approved last week, governments around the world are devoting resources to preparation, with test kits and protective gear, and to prevention, with rushed efforts to develop a vaccine. As we become better equipped and trained to deal with the new viral threat, the fear of it will ease and activity will slowly return to normal. While the World Health Organization cited a 3.4% death rate, based mainly on the experience in central China, researchers at the University of Hong Kong on Friday released a study putting the rate at 1.4%. This figure may still overstate the risk in well-prepared economies with advanced health care systems.
Even a death rate of 1.4% is not trivial. The losses are no less tragic for any of the individuals and families who become casualties of the disease. But ultimately COVID-19 is not going to be a showstopper for the global economy. We don’t know how deep a downturn may be, but we have pretty strong reason to believe it will not be very long-lived. Markets have been in the acute phase of the viral illness for the past couple of weeks, but the recovery process is inevitably getting closer.