The Coronavirus Contraction

No one knows how long the impact from this virus will last or how much it will hurt. What we do know is that the cure for flattening the curve of new cases is killing the U.S. and global economy. The changes deemed necessary to defeat the virus – businesses closing and people no longer engaging with each other – are bringing everyday business to a halt and delivering a death blow to the longest economic expansion on record. In the U.S., the fallout from the coronavirus outbreak has led to predictions for losses of up to five million jobs this year and a drop in economic output of as much as $1.5 trillion. Although the economy was quite strong in January and February, a recession is now all but certain, according to a Wall Street Journal survey of 34 economists, which projects a downturn that would last months at least, and would in some ways rival—and possibly even surpass—the severity of the 2007-09 slump triggered by the housing collapse and subprime loan debacle. Indeed, some notable economists have predicted a drop in 2nd quarter GDP of over 20%.

The decline in the stock market has been the swiftest in history. The Wall Street Journal reports that stocks are falling faster than they did during the financial crisis, the crash of 1987 or the Great Depression. Investors are retreating from corporate bonds at the swiftest pace ever. An index of raw materials is at all-time lows. And funding shortages around the world have fueled a race for dollars, powering the U.S. currency to a nearly 18-year high

The Fed is using many of the same tools they used in the financial crisis and plans are being made for a massive fiscal stimulus package. However, stock futures have dropped significantly this morning after an impasse in the Senate Sunday night revealed a partisan divide remains alive and well, even as contagion fears grow.

Ben Carlson reports that this is the 13th worse bear market since the late-1920s with losses exceeding 30%. It would take another 15% drop from here to get to a 40% loss. It would take another 30% drop from here to get to a 50% loss. We don’t know if this is going to happen and neither does anyone else but it’s certainly possible. It’s happened before and it will happen again, even if it’s not this time. It’s anyone’s guess what comes next. But eventually we will get past this. We ALWAYS do. Stocks will bottom and there will be a massive rally.

We don’t know when, but it will happen.

Here are the other 12 bear markets that are worse than the current version along with their ensuing one, three, and five year forward returns:

The bad news is we have no idea when stocks will bottom. Maybe it will happen in a week…or a year. Who knows? But it’s going to come at some point. You won’t invest at the absolute bottom unless you’re ridiculously lucky. But the point remains that the bigger the losses the higher the expected returns.

This feels like an awful time to buy stocks. That’s usually a good sign (although things could always get even more awful from here).

The LVM Team

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