The Current Health of the Economy During the COVID-19 Outbreak
While reaction to the Coronavirus COVID 19 continues to remain top of mind, we want to bring attention to the current health of the economy. Generally speaking, we believe there are four different triggers that tend to lead to recession.
The health of the economy in four indicators
The first trigger we look at is unemployment. Just last Friday, it was announced that unemployment fell to 3.5%. In fact, the Labor Department reported that there were 273,000 new jobs in February, nearly 100,000 more than the anticipated number of 175,000.
The second trigger we look for is whether the Federal Reserve’s policy is too tight. When we say that the Federal Reserve’s policy is “tight,” this just means that they are raising interest rates to combat inflation. Currently, the Federal Reserve is loose, as they cut rates by 0.50% on Tuesday, in an attempt to curtail any short-term economic impact from the COVID 19.
The third trigger is overvalued stocks, as it may imply a bubble has formed. In 1999 before the Dot Com Bubble, the Price-to-Earnings ratio (a ratio used to measure stock valuation) for the S&P 500 index was 30.8. Today, this ratio is 22.2, well below the valuations we saw at the turn of the century.
Lastly, the final trigger is geopolitical risk. In a previous piece we wrote on February 5th, we observed every epidemic since 1950 in which there were at least 100 deaths. While one death is one too many from these epidemics, we wanted to objectively analyze how the markets have reacted to each of them. As a recap, the market saw positive returns in the 90, 180, and 365-day periods following the outbreaks, implying that they tend to have little impact on the markets in the intermediate term. In short, none of these four triggers are currently showing weakness.
As we have mentioned in previous articles, movement in the market is typically driven by one of three things: fundamentals, technical analysis, and emotion. Fundamentals in the health of the economy are still sound, with unemployment matching 50-year lows and the economy continuing to beat job growth projections. While supply chains will be affected in the short-term as companies adjust to supply shortages and shipment delays, we don’t believe there will be a long-term impact on these companies. While second and third quarter growth may show an impact, we believe that this will be a temporary decline as opposed to a prolonged issue. On the technical analysis side, our recession indicators continue to remain positive. As a refresher, these indicators would have caused us to exit the market in December of 2000 and July of 2008, well before the worst of each of those recessions. However, these were the only two times in the past 20 years that our indicators would have shown a negative reading. In fact, every indicator was positive through the 2018 correction that saw the S&P 500 fall 19.78%. Sure enough, it was a correction and we recovered with a strong 2019. While we can’t guarantee the same will happen this time, none of the indicators have shown weakness. Lastly, emotional overreaction can drive the markets. Since both the fundamentals and technical indicators are showing strength, we are inclined to believe that this is the driving force behind this market correction.
Like we mentioned in “A History of Market Corrections,” market corrections are a healthy part of investing, as they prevent the stock market from becoming overinflated in value after periods of rapid growth (like the growth we saw in the fourth quarter of 2019). Market corrections historically occur an average of every eight months, and they typically include a catalyst that causes it. In 2010, it was Greece requiring a bailout. In 2015, it was slowing Chinese economic growth. Today, it is a fear of how supply chains will be interrupted due to the Coronavirus COVID 19. It can be difficult to remain disciplined in volatile times, but that is what we strive to do at Victory Fiduciary Consulting. We will continue to analyze the health of the economy and market daily, and we will inform you if we see any material changes in market conditions. However, since we have yet to see any changes, we will continue to stay the course. Volatile times remind us of a letter written by Dean Witter on May 5, 1932:
“Dear Clients, All of our customers with money must someday put it to work-into some revenue producing investment. Why not invest it now, when securities are cheap? Some people say they want to wait for a clearer view of the future. But when the future is again clear the present bargains will have vanished. In fact, does anyone think that today’s prices will prevail once full confidence has been restored? Let us face it-these bargains exist only because of terror and distress. And when the future is assured, the dollar will have long since lost its present buying power. It takes courage, of course, to be optimistic about our country’s future when nearly everyone is pessimistic. But it is cowardly to assume that the future of the United States is in peril.“
It can feel unnatural to be greedy when others are fearful, and it can feel unnatural to be fearful when others are greedy. However, following this old adage has been a sound guide through market history. Stay strong, stay disciplined, and don’t hesitate to reach out if you have any questions or concerns.
Bud Verfallie, CEO
Bud holds several professional designations including: AIFA (Accredited Investment Fiduciary Analyst/Center for Fiduciary Studies), PPC (Professional Plan Consultant/Financial Service Standards), and CFP (Certified Financial Planner/College of Financial Planning), ranking him in the top 1% of all Investment Consultants nationally.
Bud has been an instructor/trainer for over 25 years. Subjects include: “How to Initiate a Successful Asset Management Business in Your Accounting Firm”, “Converting Your Commissioned-Based Investment Practice to Fee-Based”, “How to Establish an Asset Management Practice”, and “Investments and Financial Planning.” Bud has taught financial planners CFP Preparatory classes for the NIF.
Prior to her career in the financial services industry, Ashley earned her Bachelor of Science in Nursing from Cedarville University.
Ashley decided to make a career change from her ten years within the healthcare industry as a pediatric emergency room nurse to retirement and 401K investment planning. She joined Victory Fiduciary Consulting in 2008 after obtaining her Series 65 professional financial license and went on to earn her AIF (Accredited Investment Fiduciary) professional designation from the Center for Fiduciary Studies.