It’s hard to escape the alarm the Coronavirus or COVID-19 has created globally. Every day and every hour, the media reports on the latest number of patients who’ve either contracted the illness or the number of casualties who’ve succumbed to it.
It’s also hard to forget the calamity in the financial markets. Last week, we saw some $8 Trillion being wiped from the major stock markets. The rebound and relief rally hasn’t been enough to calm nerves.
I’ve had many people ask me what they should do with their money and how worried they should be about an ensuing recession.
The best advice I can give and one I am following is this:
I can’t predict the future, nor can you or anyone else. Your best defense is to recognize the underlying fundamentals that affect money and businesses because that will give you more confidence with your money. Have a plan that’s proactive and not reactive, and protect for the downside.
These are absolutely in your control. When you do this, you’ll be more inclined to block out the noise and stay focused.
The Effect of COVID-19 on Global Businesses
Having covered the economy and markets for 15+ years as a financial correspondent and analyst, there are signs and indicators I’m paying a great deal of attention to, and that is which sectors are being affected, where, and how deep and wide the damage could be.
The global response by authorities to help contain the coronavirus epidemic and prevent a pandemic has been rightfully, to restrict social contact in those highly affected areas – namely China, Japan, South Korea, Hong Kong, Singapore, Iran, and Northern Italy.
That means people are not going out, they are not travelling and in some cases, particularly in China, tens if not hundreds of millions of workers are not going to work.
As a result, tourism and travel companies, restaurants, bars and retailers in or related to highly-affected areas are taking a hit. Consumer-spending which is often the backbone of any economy is suffering.
The problem is that companies have fixed costs like rent, loan payments, perhaps wages, and utilities they still have to pay regardless of how business is doing. If these disruptions are long-lasting, companies could go under – especially small businesses that don’t have flexibility. In turn, we’d see job losses, lay-offs and a greater hit to spending. Even if closures are temporary, most business owners have already taken a hit to their pocketbook, and that’s likely to have an effect on future spending in the near term.
While these are examples of local repercussions, I’m paying particular attention to global companies who depend on revenue from, or production in larger markets such as China and Japan.
I want to know how much work stoppages have affected the global supply chain of different companies.
If for example, Apple makes parts in China (which it does) and no one is able to show up for work to produce them, how will it impact its ability to meet product demand elsewhere in the world? If a bulk of their profits come from China and no one is shopping, what’s the impact then? The company is likely to take a short-term hit because it won’t make its quarterly sales, and the stock reaction will reflect this. But if it’s able to play catch up and meet capacity in future quarters, we should see a rally in the stock later. The challenge is we don’t know the timing of any of this and the actual impact on Apple’s revenues and profits.
The Impact on Global Stock Markets
The fear and uncertainty as to where COVID-19 will spread to next and the impact on businesses are what sparked the market sell-off. That’s because it’s not just one sector or geographic region that’s been affected – the impact is widespread.
The reality is that the markets have had an unprecedented ten-year bull run, and so there’s been talk of a correction for some time. We didn’t know what could trigger it and then came the coronavirus.
We can’t completely ignore the market reaction because it’s reflecting the possibility of lower corporate revenues and profits, but we need to separate what’s happening on the stock market and the impact on the real economy.
In the U.S., eighty percent of the value of the stock market is owned only by 10% of the population – mostly the rich. They will bear the brunt of a sell-off. Pension plan values may be dented but most are well-diversified with a long-time horizon so I’m not alarmed in the least.
What I am watching for though, are signs of the COVID-19 spreading and paralyzing businesses in more of the largest markets (namely the U.S. and Japan), resulting in job losses and a drop in consumer spending. For now, the U.S. is not under threat but should that change, this will tip the scale.
I hear media reporting on the possibility of central banks cutting interest rates or “providing stimulus” and pumping money in the economy, and I get incredibly frustrated.
The only thing this will do is prop up the stock markets and support the wealthy. And it will only provide temporary relief. Lower interest rates will not entice people to spend or invest when they can’t go out. It won’t replace empty shelves if people can’t go to work. I firmly believe the only thing we can do is do our best to contain the virus and wait it out.
Your Money & Investment Portfolio
So what does this mean for your money and portfolio?
First, I’d encourage you to not panic and react to the daily noise produced by the markets. If you’re tempted to look at your investment value, remember that these are “paper losses or declines”. Until you physically sell your investment, you haven’t realized a loss. If you have dividend stocks or bonds, you’ll continue to receive a regular income so the value is less relevant – unless on the rare occasion the stock price drops so much that it threatens the company’s ability to continue to pay that dividend.
Remember that if you’re in your 40’s or younger, even if the market falls dramatically, there is time for it to rebound by the time you need to dip into your funds to live off.
If you’ve built a diversified portfolio, review it to see if the composition is in line with your risk preference. If it’s skewed, rebalance it but don’t try to time the markets. It’s tough for even the most seasoned investors. Have an advisor? Set up a time to speak to him and her.
If you’re dollar-cost averaging, that is making regular investment purchases, there’s little reason to change course. When the market is down, it means your money will be able to buy more shares or units.
The last point I’d make is if you’re worried at all of a recession or your business or job being vulnerable, take the proactive steps to become recession ready. Learn more by reading this article.