We are wading through unprecedented times, both in terms of public health and the economy. Although it is extremely difficult – if not impossible – to predict exactly when the COVID-19 pandemic will slow down, we have been able to observe and analyze its impacts on the economy thus far. In the first part of this post we will share with you some of the economic impacts of the current situation thus far. We’ll then review some speculation into what its future impacts will look like. And also we’ll discuss when we can reasonably expect both the U.S. and global economy to return to some semblance of normalcy. In the second part of the post, we will discuss how the coronavirus crisis will specifically affect your investments, and what you can do.
The Economy Now
It goes without saying that social distancing measures have radically changed our economy. Industries relying on elastic consumer demand – notably restaurants and non-essential businesses – have suffered dramatically.
But it goes so much deeper than that. In order to get a full view of the economic impact of the coronavirus outbreak, one must examine its impact on industry supply chains:
- the farmers that grow food for shuttered restaurants
- the commercial truck drivers that deliver that food
- the food storage companies whose products refrigerate the food for the restaurants
We will start this discussion by looking at how several specific industries have fared during the coronavirus pandemic thus far. We’ll then move into a more broad discussion of what we can expect the economy to look like moving forward.
The restaurant and hospitality industry
The food industry is an obvious, and complicated, one to start with. Restaurants are of course suffering, And they may continue to suffer even after social distancing measures are lifted. Experts say that it is not hard to imagine a future – until a vaccine or highly effective treatment is available – where restaurants must severely restrict the amount of diners they allow in.
Places like restaurants and cafeterias are generally among the nation’s largest buyers of perishable food items. With the abrupt closure of both, farmers and food suppliers have been left with unimaginable amounts of food waste. It is nearly impossible to predict when farmers and other food workers will be able to recover from this. So until we have a better idea of when social distancing measures can safely decrease, this remains uncertain.
Immigration restrictions will also have an effect on our food system. This is because the majority of workers for labor-heavy farm work, such as strawberry picking, typically come into the U.S. seasonally. This will certainly have an effect on the supply and price of many of these labor-intensive harvests.
E-commerce for food
On the other hand, food retail sales have experienced a huge spike since the onset of COVID-19 in the United States. Food retail sales went up by 30% from February to March of 2020, which is 25% higher than they were in March of 2019.
E-commerce food sales, often considered the last frontier of e-commerce purchases, have also seen a dramatic increase. Along with increased food sales has come the demand for more cold storage food equipment. There have been efforts to re-think some food supply chains. This means that grocery stores receive some perishable items typically intended for restaurants and cafeterias. This is not easy to coordinate, of course. And it requires a significant amount of commercial drivers.
The transportation sector has suffered gravely as well. There has been a definitive slump in the entire automotive industry supply chain. People are driving far less than they were before the spread of the virus and social distancing measures. This therefore has not only resulted in a huge hit to the global oil market, but also a drastic drop in car sales. Some factories producing various car parts have transitioned to producing medical supplies to combat the virus.
The airline and travel industry
The airline industry, despite benefitting from the recent stimulus package, has taken a huge hit to recent travel restrictions. Experts predict that the airline industry could be adversely impacted more than five times as much as it was due to 9-11. They expect international travel especially to suffer.
The U.S. and unemployment
The COVID-19 crisis has already led to record levels of unemployment. 22 million Americans filed for unemployment in the month following President Trump’s declaration of a national emergency, and that number is increasing daily.
So now we are left with the question of what happens to our economy next?
Will there be any long-term economic silver linings to the coronavirus pandemic?
The answer to that second question is maybe, in a way. Some experts predict that the global scale of the coronavirus outbreak will lead to stronger domestic supply chains in the future. The incredible uncertainty of the global marketplace will make it much more difficult to use international supply chains, forcing the U.S. to develop a stronger domestic infrastructure.
This could be one small victory in a sea of otherwise unfortunate news.
Many economists say that we are already in a COVID-induced recession. The U.S. GDP will certainly continue to drop in the second quarter. Although, estimates of how much it will drop vary – the average estimate says by about 12%. But more drastic models predict that it could drop by as much as 40%.
The global economy
Looking at the global economy, the UN International Labour Organization predicts that the world will lose between $860 billion to $3.4 trillion in labor income. Although we will likely experience a small economic rebound as states begin to open businesses up again, we won’t truly know the impacts of COVID-19 on the economy until we are back to “normal” again, meaning there is either a vaccine or highly effective treatment available for the coronavirus.
And it is likely that by this point, the U.S. will be dealing with inflation, a huge economic deficit, and higher interest rates. Many estimates show that it will take 2-3 years for world economies to fully recover.
COVID-19 and Your Investments
With all that in mind, what does the COVID-19 pandemic mean for your investments? First, don’t panic. If you have invested wisely up to this point, and continue to invest your wealth wisely, this should not be a make or break scenario. Many investments weathered the 2008-09 recession, and they will weather this one as well. But of course, we have a few suggestions.
First, the way to approach the coronavirus investment era depends on when you are planning on cashing in on your portfolios. If you were hoping to take the money in 2-3 years, you are in a different place than someone who is planning on 10-20 more years of investing.
For those with a shorter term investment shelf life, we recommend that you pursue a low risk portfolio. If you mitigate risk the best you can with through money market funds and trusted, high quality companies, doing so should be enough to keep you on the “right” side of inflation. If you have more time left on your portfolio, you can take more risk. There is no need to sell right now; just invest high quality companies, don’t put all your money into stocks, and let this pass.
As mentioned, this is a prime time to identify high quality, sustainable companies. This can actually be a unique opportunity for high net worth investors to take advantage of the altered financial landscape that will emerge as a result of the pandemic. You will likely need to tweak your portfolio during the downturn, but with smart investing you should be able to come out on top.
It’s Worth Repeating: Diversification is Key
Perhaps most significantly, COVID-19 has underscored the importance of having a diversified portfolio. We’ve talked about it many times in our posts, and never has it rung more true. Those who only invested in the stock market have been hit very hard by the coronavirus, those that spread their assets around have fared better.
Treasury bonds especially have helped investors to counter their stock market losses. Stocks are highly volatile; the market was experiencing all time highs just at the beginning of this calendar year, and is now facing its most drastic decline in modern history. By investing in a diversified portfolio, you will be able to protect your wealth from the extremes of the economy. Placing some of your assets in the stock market is fine, as long as you have invested other assets in more resilient ways.
With a combination of patience, paying close attention to the marketplace and how corporations are faring, and smart investing, high net worth individuals should have no problem weathering this storm, and maybe even coming out of it stronger than before.
We Can Help
There are few things that affect as many areas of your life as your wealth. Treat it with the attention it deserves and it will repay the favor. Thinking about retirement, estate, or financial planning or want to use your wealth to provide for younger generations? Proper wealth management via portfolio diversification is what will make it happen.
At Saddock Wealth, we bring years of wealth management experience to the table and can help guide you toward financial prosperity. Schedule a meeting here, and we’ll discuss your best options.