Updated: Apr 17, 2020
There has certainly been no shortage of scary headlines in the news!
Lets talk about some of the potential threats here. First off, it's a brand new virus, or at least the first time we've had to deal with this virus on a large scale. So we don't know that much about it. We don't understand fully the pathology of the virus. Of course, we haven't had time to develop vaccines, so virtually everyone is vulnerable. And outside of direct contact we're not even sure how it spreads, as far as how long it can live on other surfaces. If you go to the CDC website to learn about the virus it literally states in bold here, "We are still learning how it spreads." I think what's really important for everyone to understand is that really what we're trying to do is make sure that everyone doesn't get the virus at the same time, so that millions and millions of people have it, and even if just a small percentage need to be hospitalized to get over it, that could really flood the hospitals and our health care system.
I think Dr. Forman of Yale University explains it well,
"We can accept the idea that maybe 30 million, maybe 90 million people in the United States, maybe even more, will become infected with this over the next 12, 18 months. What we can not afford to have happen is for 30 million people to become infected over the next three months or four months or five months. So let me just say that I think for this short run anything we can do to mitigate a huge spike in cases will serve us really well." Link to video.
So how do you prevent a disease from spreading if you're not entirely sure of how it even spreads or how long it can live on the surface of your door handle, or how to even efficiently and effectively test people?
Basically you shut everything down... and that is going to have some serious economic impacts!
If we are unable to go out and spend, we are therefore taking away someone else's income. Everyone's spending is another person's income. This is also going to have serious impacts on the stock market.
On a very fundamental level, companies are valued based on revenue, earnings, tons of different metrics, but at the end of the day, if they're not able to sell more products, well then the value of the company, of the business isn't worth as much. So what happens? Of course their stock price reflects it. So what we have seen in the market is investors trying to understand how to value these companies with this major pullback in spending.
Now with all of these big market swings of course people are going to be asking "How can I build wealth and make money off of this market volatility?"
If there's one takeaway from this article is that nobody knows, and nobody with any level of certainty can make profits off of the market going up and down. Period.
Of course there are a few things that you can do, either on a tax standpoint, maybe doing some Roth conversions or navigate the new CARES Act. Consult your CPA or financial professional for assistance!
Now the second thing I want you to take away from this article is not to panic. Nobody ever built wealth panicking, and that really goes hand in hand with not feeding too much into the news. The news and the media make money off of viewers, so that they can get more money from ads and commercials. What we need to do is understand that the news media has an agenda. If it bleeds, it leads, right?
So I want to start to just show you a couple news headlines that you're probably gonna see this week.
1. President Trump declared a state of emergency or a national emergency against the corona virus. All this really does is it allows states and other agencies to access back up and reserve funds and money, to help contribute towards the cause here. Plus, this is the sixth state of emergency declared during his presidency!
2. The Federal Reserve on Sunday, March 15th (2020) met a couple days earlier that expect, the news is going to say they had "an emergency meeting". And what they did was they cut interest rates, virtually to zero. The Fed is just doing what they can to try to support the economy, and try to encourage people to continue to spend, maybe refinance that mortgage, put more money in your pocket in a different way.
3. We are in a "Bear Market". That simply means that the market is down 20% or more from it's all time high. Yes, we're down a little more than 20%, so we're in a bear market. And just to give you some context, since 1929 we've had 24 bear markets, so about one out of every three-and-a-half years, we have a 20% draw-down, or a bear market. The average draw down is about 33%. And what's really interesting is that on average to go from peak to trough, and then back to where you started, takes about 26 months. So, really just over two years, most bear markets are able to fully recover.
4. Are we going into a recession? Now, the definition of a recession is traditionally two quarters in a row, so six months, of GDP decline. So a shrinking economy for six months. Based on a lot of these the government's preventative measures that we have where we're canceling events, we're working from home, all of these different things are certainly going to slow down the economy, there's no question. Is it going to last for two quarters in a row to call it a recession? I don't know, I honestly don't care of what we're going to call it, or what's the definition. I know for sure though that there's going to be some serious impacts. I don't wanna take away from that, but I do want to shed some light on we are all in this together, and I want to show some statistics here from one of my favorite financial bloggers, Ben Carlson.
I'm not going to claim our next recession will last 11 months or that the market will be up 120% 5 years later, but recessions don't have to be that scary. And if you missed the potential rebound, here's a link to my video explaining how to invest during Market High's!
Again, nobody knows where the markets going to go in the short-term, and nobody can profit with any level of certainty or consistency off of short-term market movements.
So, we need to build globally diversified, low-cost, well-designed portfolios, based on your goals and time horizon so that when the market is down, you don't have to worry.
I hope that you found this article to be helpful, and happy billing wealth!