Coronavirus, the Economy, and Your Money

Yesterday the World Health Organization officially labeled the COVID-19 (novel coronavirus) outbreak a pandemic.

Which, for all intents and purposes, simply acknowledged something everyone already knew…the virus has spread worldwide.

The same day, the Dow Jones Industrial Average dropped into bear-market territory. And that simply means that the Dow closed 20% below its record high close, a mark that was hit on February 12, 2020.

What started as a new, unknown virus in Wuhan, China on December 31, 2019, has spread throughout the globe and is having significant effects on the world’s economies.

The Economic Effects

The concrete economic effects are limited at this point.

However, the fear associated with the unknown is driving markets down and leading to unprecedented actions to limit the transmission of the virus.

And it’s this fear, and actions (likely necessary) that will lead to concrete, negative economic effects both here in the U.S. and around the world.

The only question at this point is how long will the lives of Americans be disrupted from what is considered a normal flow and how widespread and to what level the coronavirus will affect the population.

Obviously, the health aspect is of prime concern. We need to get a handle on how many cases we currently have in the U.S., and mitigate future infections.

The best case scenario is that we limit the virus’s spread and, potentially, shorten the period of time we have this virus affecting the country.

Which is what we’re beginning to see now. Many events are being canceled, or the format changed, to minimize large gatherings of people where transmission of the virus is more likely.

But these actions will have economic consequences.

Our consumer-based economy relies heavily on people being out and about and spending money.

The effort to quell the virus’s spread is in direct opposition to that.

So make no mistake, businesses and economic activity are going to suffer as the U.S. government and governments around the world work to slow the virus’s spread.

Large businesses are going to see lowered revenue numbers…if any at all…over the coming months, and depending on their financial position, small and medium-sized businesses may simply go out of business.

That’s the cold, hard reality of what we’re facing right now.

Luckily, most health experts believe the worst of the coronavirus should be over in 2 to 3 months.

And talk is beginning at the federal level for significant financial assistance to assist businesses who will be adversely affected by the current economic climate.

My guess is, once the politicians get over their pettiness, we’ll see a comprehensive financial plan for helping not only business, but individuals, as well.

While it may not have seemed like it only a week ago, we are in unprecedented times right now.

And the actions currently underway, and that will be taken in the coming weeks, will underscore that.

Indirect Adverse Effects

I’ve written for years now that our stock markets and the economy overall has been artificially inflated as a result of ultra-low interest rates.

Too much money was available at close to zero interest rates for far too long.

Money flowed to areas that it normally would not in search of a yield better than 1-2%.

And some of those areas were, and are, not financially stable without continued infusions of funds.

The drops we’re seeing in the stock markets right now are primarily related to fear and the lack of knowing what will come next.

However, that retrenching of the markets and the run-for-cover actions has begun to reveal those questionable areas of the markets that were propped up by easy money.

The oil and gas industries are one that many should be worried about right now.

Missed by most in the coronavirus fervor was that Russia and Saudia Arabia got into a semi-price war with regard to oil prices this past week.

Most U.S. consumers will view the two countries’ unwillingness to curb oil production a good thing.

And while it is a positive when it comes to how much we pay to fill out vehicles with gas, the downside is that many U.S. oil and gas producers are highly leveraged (in debt) and when oil prices are at the $30 per barrel level, it’s very difficult for them to actually make money.

And if they can’t make a profit, they can’t pay their workers and they can’t service their outstanding debt. The result: they go out of business.

Some say the actions of Russia are an intentional move to hurt the U.S. oil and gas industry, allowing them to take market share when there are fewer U.S. companies to produce and sell the much needed commodity.

The issue with the U.S. oil and gas industry isn’t a direct result of coronavirus, but it was partially brought on by the lowering price of oil due to the reduced global demand thanks to the virus’s spread.

Russia just decided to take advantage of the situation.

We’re also seeing significant disruptions in the bond market as a result of the bigger coronavirus picture.

This is an area that most, including me, have little to no understanding.

But rest assured, it is a major deal for the financial markets, and one that needs to be closely watched.

Just this afternoon, the Federal Reserve Bank of New York released a statement that unprecedented (my term) amounts of funding would be offered to “address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”

The amount of money they’ll be infusing into the system…approximately $1.5 trillion “…to foster smooth Treasury market functioning and efficient and effective policy implementation.”

For those who think the coronavirus is just another kind of flu…well, it may, or may not, be, but it most assuredly is having significant impacts, beyond the obvious, on worldwide financial markets.

And how that will end, is anyone’s guess.

Your Money

So, in these highly volatile and uncertain times, what should you be doing with your money?

If the majority of your money is in a bank account, you’re safe. Traditional financial institutions are insured up to $250,000, more than enough for most people. So no matter what happens to the economy, that money is safe.

If you don’t have money saved, try to do so now. Any extra money can be helpful as we navigate the coming months.

Much of what we publish here on Savings Beagle is geared toward saving and freeing up money for situations just like this.

Things have been good for a long time now. That’s about to change. At least for the foreseeable future. Having a little extra cash on hand is advisable.

But don’t stop spending altogether! Economic activity, especially via spending at small businesses, will be vital for turning the corner on the impending economic slowdown.

If you have any money invested in the stock market, your best move is to do nothing.

Yes, it gets unnerving watching your IRA or 401(k) balance decline, but to try and play the market timing game is a fool’s errand.

If you’re not out already, it’s too late. Just hold tight and wait for the rebound.

It will come, guaranteed.

The only question is, how long will it take for the world to get a handle on the coronavirus and then how long to stabilize its economies. Once economic activity normalizes, the stock market will follow.

The graph below of just prior to the Great Recession up to today should provide some comfort that markets, even following historic economic crisis, do come back.

It may not, however, reach the highs we just saw mid-February any time soon.

If you don’t have money invested via a retirement account, you may think “who cares about the stock markets.”

As I’ve discussed many times in my Quarterly Updates, many aspects of our lives rely on a solid, growing stock market.

If you are part of a public or private pension plan, a large part of your current or future monthly benefit relies on growth in the stock market.

The amount you pay for various insurance products is based, in part, on the investment returns of the insurance companies.

I could go on, just know that even if you’re not invested in the stock market in any way, its performance has a financial effect on your life.

So we all hope for a quick end to this coronavirus outbreak and an even quicker return to economic normalcy.

This will pass. It will just take some time to get there.

In the meantime, do your best to remain healthy and refrain from financial moves that you may regret later on.