We are facing something we have never faced before in our lifetimes. That is a fact and, in a time, when the news of the pandemic is spreading and the recommendations on social distancing are getting broader by the day, it can be hard to feel certain or safe about anything.
As troubling as it is to watch the unprecedented market decline and as hard it is to tune out the fact that you know you are losing a lot on your investments, we need to maintain our health and the health and safety of our family, friends and neighbors as the number one priority. Covid-19 which emerged late in 2019 in China has spread rapidly worldwide since then and is a global pandemic. The measures taken by leaders around the globe have been drastic leaving most children without a classroom to go to, parents working from home or without a job altogether and investors panicking about what is to come.
This disruption to daily life and to our psyches is substantial and it’s terrible. The coming weeks will not be easy, but these measures are practical and prudent.
Our Current Reality is not Permanent
The markets have made a clear statement as to what they think of this short-term reality. They have recognized that what is necessary to combat a further global public health crisis far worse than what we are seeing now will also result in a great deal of collateral economic damage. Growth, over the short-term, which drives optimism for many investors and that, as we know, is really what the market thrives on, will be stunted. Economists have resigned themselves to the fact that a mild recession is very possible, though experts believe it could be short-lived.
China, which has seen the worst of the outbreak and is slowly returning to normal daily life, is expecting a smaller GDP growth of around 5% for 2020 versus 6.1% for 2019 though that number may shrink depending on the impact the virus has on its global trading partners. The reality is that much of the world may experience a short-term recession, but without these drastic measures today, the impact both in terms of public health and economically could be far worse.
In a time when uncertainty is simply a part of daily life, let’s look at some points where we can perhaps gain some valuable perspective:
- Markets see sharp decline from time to time: While never an easy pill to swallow, bear markets actually happen on a regular basis. In fact, bear markets typically happen about every 54 years and this nearly ten-year growth uninterrupted spurt is actually more unprecedented than this most recent shockwave.
- Economic and Market Recovery is highly likely. The recession that followed the global financial crisis of 2008 and 2009 was very long. There is still anxiety among those who were so deeply affected by it that it could happen again. This current challenge doesn’t have the same characteristics, however. Our economic foundation is much stronger than it was then. As Joe Davis, Global Chief Economist for Vanguard put it, “The global financial crisis was a house of cards falling down, a crisis of excessive leverage, with the financial system itself in jeopardy. The system is sounder now. And although we do expect that global economies will contract in the second quarter; we believe that most will be in a position to rebound strongly later this year and early next year when the virus-related shock subsides, and pent-up demand emerges.”
- The response by leaders worldwide will be critical. The swift and decisive action taken by world leaders in recent weeks to mitigate the spread of the virus is the same type of approach that must be taken toward the economic impact. If economic policymakers take advantage of the interest rates at almost-zero and use that stimulus to contain the virus and provide cash flow for households and small to medium-sized businesses to stay afloat, then the fallout will more likely remain a short-term issue and not a long-term problem.
Making our way through this is something that will require us all to come together as a community both locally and globally. And for that reminder, I am grateful. We are all in this together and it will truly take all of us working together to right this ship. In the meantime, we must take comfort in what we know and keep perspective on all that we do not. What we know is that there will be a temporary downturn but, we believe that securities markets and the global economies are and have always been resilient and there is no reason to think that this time should be any different.
- Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index, thereafter, indexed to 100 as of December 31, 1979. Both indexes are denominated in U.S. dollars.