What it minds is uncertainty. And uncertainty is what we have today. No one really knows how bad the novel coronavirus outbreak will get and how far it will spread. On the economic front no one knows how badly all this will affect the global economy and how long it will take for things to recover.
This is why the stock market is so volatile. Our take is this viral outbreak will cause real economic pain but right now this is still not 2008–2009. Back then the whole foundation of the U.S. economy was in question. Lehman Brothers went bankrupt in September 2018 and AIG and GM were bailed out that Fall. In the first quarter of 2009 we were literally handicapping which of the four largest U.S. banks would be the first to go under
Today, household debt is far less a problem then it was back then, unemployment is low and bank balance sheets are strong. There is likely to be a recession now and it could be quite severe but if we can weather the storm, if social distancing achieves the objective of moderating the outbreak then in three to six months the economy will be on sounder footing and 2021 will be a recovery year. That’s the hope at least but in the meantime there will be painful stories.
The stress in the consumer and retail sectors including autos may be most severe and the oil and gas industry is also questionable especially highly indebted fracking companies dealing with the sharp drop in crude prices. But again, we think that many sectors can weather a three to six month storm and the underpinnings of the economy will withstand the current weakness.
On a personal note my wife is in business in China manufacturing and exporting furniture fabric to Europe. Many fabric factories there have re-opened and although they are not at 100% capacity, volume shipments are expected by the end of March. This is very encouraging news from an economy that makes up such a big part of global supply chain (see below) and one that has grown from 5% of global GDP twenty years ago to now nearly 20%.
The Chinese word for crisis is made up of 2 characters, “danger” and “opportunity”. We are most definitely seeing the psychological impact of ‘danger’ in the market today. Eventually we will right the ship, see the ‘opportunity’ and recover. All is not lost that is in peril.
