Economy: Where Do We Stand?

COVID-19 

COVID-19 has had a profound effect globally with the current count at over 1,346,482 cases and more than 74,693 deaths, but we are seeing encouraging reports indicating that 95% of active cases are classified as mild with only 5% considered critical. In terms of total cases, so far reports show that approximately 5.5% have led to death, most of which are concentrated in the elderly and those with compromised immune systems. As it stands, with few exceptions, those with a healthy immune system have ultimately recovered. Even still, scientists are working on vaccines and effective treatments for the virus so as to limit its potential consequences moving forward (“flattening the curve”).  

Gross Domestic Product (GDP), which represents the total output of our economy, is comprised of  Consumer Spending, Government Spending, Business/Industry Spending, and Net Exports. GDP was  $21.44 trillion in 2019. This measure of productivity has been substantially impacted by the spread of  COVID-19, with 71.2% of total GDP comprised of Consumer Spending, an area that has been hit  incredibly hard as millions of Americans delay discretionary purchases amid quarantine and layoffs.  

Many economists expect the 1st quarter GDP drop to be 9% or more, with the 2nd quarter expected to drop even further by 34% or more. They expect the 3rd and 4th quarters to rebound substantially, but still seeing the 2020 GDP declining by 6.2% or more. The projected recovery during the second half of  2020 is expected to continue into 2021.  

In response to this global pandemic, Congressional lawmakers have taken steps to introduce a $2 trillion stimulus bill that will provide much-needed funds to individuals, small businesses, and corporations that have been most affected by COVID-19. This stimulus package has been purposely designed to offset economic losses dollar-for-dollar to lessen the impact of the looming recessionary environment.  Additionally, The Department of Education is doing their part by suspending payments on student loan borrowers without penalty through the 3rd quarter. These, as well as many other actions, are being planned and placed into effect to protect against unfortunate circumstances such as foreclosures and evictions, in addition to providing support to those who are currently unemployed or working as independent contractors.  

The Long-Term Approach 

As investors, we take a long-term approach to markets and understand that short-term market timing is a recipe for disaster. When an investor sells into market weakness, they lock in short-term losses at the expense of their long-term goals. Behavioral finance teaches us that giving into emotion and selling in a  downturn often creates a more challenging conundrum than simply sticking to an initial investment plan and waiting out the correction. 

Timing the market is impossible for even the best investors to consistently achieve successfully, so we recommend avoiding this behavioral pitfall at all costs. History shows us that investors who attempt to time the markets typically sell at the bottom and buy at the top, which as we know, violates the “buy low, sell high” philosophy. 

Our Outlook 

With unprecedented economic stimulus on the horizon, we project that a recession is imminent, but that it will be brief, with the U.S. markets rallying in the 3rd and 4th quarters when corporate earnings begin to realize the effects of a recovery in consumer spending. 

Given this information, we recommend that long-term investors stay put, if not buy more into the markets with a long-term outlook. 

We will keep you abreast. 

Health and safety to all, 

David Adefeso

References: 

https://www.cnn.com/2020/03/25/politics/stimulus-package-details-coronavirus/index.html
https://www.worldometers.info/coronavirus/
https://www.investopedia.com/insights/worlds-top-economies/ 
https://www.thebalance.com/components-of-gdp-explanation-formula-and-chart-3306015 https://google.org/crisisresponse/covid19-map https://www.cnbc.com/2020/03/31/coronavirus-update-goldman-sees-15percent-jobless-rate-followed -by-record-rebound.html

Legal Information and Disclosures 

David Adefeso is the Chief Executive Officer of The Pacific Group. He oversees all aspects of the firm’s operations. Prior to The Pacific Group, David worked as a Wall Street Investment Banker with Wasserstein Perella & Co. and Salomon Smith Barney. There, he executed large and complex merger & acquisitions and corporate finance transactions for some of the world’s largest companies. His client base included Aetna US Healthcare, Magellan Healthcare, Allegiance Corp., HealthSouth, MedPartners, Snapple, Interpool Inc., Indigo Aviation, American TransAir, and BlueCross/BlueShields of California, Kansas City & Missouri. Prior to investment banking, David worked as a Certified Public Accountant. He attended Harvard Business School where he graduated with an MBA. Disclaimer: The views expressed are the views of David Adefeso through the period ending February 28th, 2020, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.

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