After the first couple weeks of social distancing, my two young sons and I were already feeling cooped up in the house (my wife, not so much as she’s a homebody). My sons could no longer participate in Saturday morning soccer, or Sunday school, or go to the zoo, or do anything that involved other people. So, I decided to go buy that second mini basketball goal, this one for my 16-month-old, to play driveway basketball for the foreseeable future.
This pent-up energy and inability to engage in normal activities reminded me of a good economic analogy: money is like kinetic energy. In physics terms, an object that is in motion has kinetic energy; the energy can be used to do work. Kinetic energy can also be stored, in which case the object has potential energy.
In economic terms, money represents the kinetic energy (i.e. work) someone has done for another person, which then enables us to easily share, store, or transfer that energy (i.e. money) elsewhere.
Social distancing is hard for many of us because we still wake up each day with the same amount of potential energy to do things, but are now (wisely) restricted from doing many of those things, keeping much of our energy stored. We now experience a significant, but temporary, drop in the amount of kinetic energy we collectively produce.
Face-To-Face With the Financial Crisis
Unfortunately, the U.S. has likely just entered a recession of unprecedented magnitude – Goldman Sachs estimates a 24% drop in economic output this quarter, which doesn’t seem unreasonable. Nearly 10 million people filed jobless claims in the last two weeks of March, raising the unemployment rate from less than 4% to 10% in just one month.
The economy appears grim right now, and you are probably reading the news each day with heightened anxiety, whether you are approaching retirement or planning to retire in 30 years.
Despite these alarming numbers, there are reasons to be optimistic.
Redirecting Our Collective Kinetic Energy
Collectively, our country’s kinetic energy is being temporarily redirected to things we don’t normally do – staying away from each other, creating emergency unemployment support systems, the Federal Reserve purchasing corporate bonds, and the FDA approving drug and vaccine trials in record time.
On a personal level, many of us have taken this opportunity to enjoy activities that do not require gathering with friends or working from an office, such as reading, playing driveway basketball, gardening, etc.
Brighter Days Ahead
We do not yet know the breadth of the financial impact of the COVID-19 outbreak, but the U.S. has overcome much greater challenges, such as the Civil War, the 1918 Flu pandemic, the Great Depression, and World War II, to list a few. The United States still has the same amount of potential energy it had before this outbreak, but our economy is a battleship – it can’t be turned quickly.
Twelve years ago, when the first banks started failing during the 2008 Financial Crisis, technological ingenuity was largely responsible for pulling our economy out of the crisis and driving growth over the subsequent decade. Think of the iPhone, Google, and Amazon.com, for example, and how tightly interwoven most people’s daily lives are with those services and products.
Today, the healthcare sector provides optimism for overcoming this crisis. Due to the ability to cheaply and quickly map genetic code, scientists around the world are already sequencing the COVID-19 genetic code and tracking community spread as well as mutations of the virus to better inform prevention, treatment, and vaccine development.
There are indications that the virus is relatively stable, which bodes well for future vaccine effectiveness. Furthermore, because of this genetic sequencing, multiple drug companies have vaccine trials under way, in record time, the first launched March 16 in Seattle, WA. Initial vaccine trial results should be available this summer, with production ramping up next fall and winter.
Investment Dos and Don’ts During Recession
Stay optimistic. While it may be difficult in the midst of a crisis, being pessimistic about the future doesn’t pay dividends. History shows that economic progress may stall in the short-run. But over the long-run, our ingenuity and industriousness will win the day.
Resist the urge to sell your stocks now that they are down. Stocks always decline in a recession. In rapid market declines, investors tend to focus on the near-term pain; instead, investors should focus on the likely long-term gains of sticking with their investments. Avoid making drastic portfolio changes, and consider rebalancing back to target stock/bond allocations.
Rely on the strength or your asset allocation. If nothing about your investment horizon, expense needs, or risk tolerance has changed, it is best to stay the course and wait for the market to recover. Remember that your portfolio was designed taking downturns into consideration, with resilience to get through bear markets such as the current environment.
Please call us if you would like to discuss your asset allocation. We are here to guide you through these volatile markets, to assist you with your plans, and to manage your investments with your best interest in mind.