coronavirus crisis

By Paul Dietrich, B. Riley Wealth Management

A number of weeks ago, a TV anchor in New York asked me when the Coronavirus crisis would be over, and when would the stock market finally bottom.

I told her I couldn’t give her a specific date, but I could tell her the precise criteria that would be needed in order to know when everything would be returned to normal.

With regard to the end of the Coronavirus pandemic, I said that the virus in China, South Korea, Taiwan, and Singapore followed almost an identical “bell curve” cycle from the first case up to the peak of new cases, and then started a steep decline until deaths and hospitalizations began to return to normal.

With regard to a stock market bottom, I told her the U.S. Government would need to pass a massive stimulus bill that would completely offset ALL of the economic damage caused by the government shutting down the US economy. 

The Congress has now passed a $2.2 trillion emergency bill. However, it remains to be seen whether the federal government and the states can distribute that money quickly enough before average workers and small business people have to throw in the towel.

Where are we in the coronavirus life cycle?

According to the World Health Organization (WHO), epidemiologists have seen a fairly consistent “bell curve” cycle.  The Coronavirus goes through a cycle of approximately 70 to 80 days from beginning to end.

It took China approximately 43 days to reach a peak in newly recorded cases and another 25 to 40 days to return to a nominal number of new cases.

It also took exactly forty-three days for South Korea to reach its peak in new cases.

News from Italy, one of the countries hardest hit by the pandemic, offered encouragement recently. Both new cases of the Coronavirus and deaths from the disease have declined there for several days.

That means it also took Italy 43 days from the first case to the peak case and 12 days after implementing the strictest travel restrictions. If history plays out, the U.S. would be about 14 days behind Italy.

If these trends continue, it would mean the U.S. could hit a peak in most major cities in the third to fourth week of April.

If the cycles here in the U.S. match those of the rest of the world, most hospital systems should be back to normal by the end of May.

How much damage will this cost the U.S. economy?

To contain the Coronavirus pandemic, the federal government started to shut down most of the U.S. economy during the second week of March. “Stay in Place Orders” came during the third week of March.

Assuming a worst-case scenario, and the U.S. economy does not fully reopen its economy until the end of May, that means the US economy will have been effectively shut down from mid-March to the end of May, or for two and a half months.

What would a two and half month shutdown cost the U.S. in GDP?

U.S. GDP in 2019 for the whole year was approximately $21.44 trillion.

If two and half months of that US GDP were utterly wiped out, it would cost the U.S. economy a total of approximately $4.5 trillion.

$4.5 trillion is a lot of money, and under normal circumstances, that kind of body blow to the economy would cause a recession.

However, the crucial question is, how much can the emergency stimulus legislation offset that $4.5 trillion-dollar loss?

The $2.2 trillion emergency stimulus legislation, combined with the Federal Reserves’ $6 trillion loan facility to make businesses whole, should more than offset the expected loss of $4.5 trillion loss in GDP between now and the end of May.

The distinction between an “artificial recession” and a “real recession!”

The standard definition of a “recession” is usually defined as a business cycle or economic cycle change from a growing and expanding economy to a declining and contracting economy.

This Coronavirus economic downturn is not technically a recession.

As investors, we need to be clear that the reason for this economic and stock market crisis is, for the first time in world history, our government forcibly shut down the U.S. economy. This didn’t happen during WWII. It didn’t happen after 9/11. It has never happened before!

This is an “artificial recession” caused by the U.S. government shutting down the economy in a severe health crisis.

It is a serious mistake for economists to use past historical recession data to compare this unique event with past recessions. Garbage in — Garbage out!

Democrats and Republicans all seem to realize that this is a unique historical crisis.

Democrats and Republicans and the Administration have all stated that their goal was to make all workers and businesses whole after the two and a half months of disruption to the U.S. economy.

If the Congress and Administration can keep their word to workers and businesses and make the economy whole again, the economy and stock market should recover before the end of the summer — and definitely before the election!

Even if you don’t have any faith in politicians, since this is an election year, I believe they will do what they say.

We are now seeing China reopen after two and a half months of quarantine. Like in the U.S., people were going stir crazy in quarantine. There are now lines outside of Chinese restaurants and shops.

The pent-up demand for shopping and returning the economy to normal here in the U.S. should bode well for a booming economy in the third quarter of this year.

Summary

At this time, I believe the $2.2 trillion emergency economic stimulus legislation and the $6 trillion Federal Reserve loan facility will more than offset the $4.5 trillion economic damage caused by the Coronavirus pandemic through late May.

I expect economic growth to accelerate during the second half of this year as the Coronavirus is contained.

As investors, we have to remember that historically, about six months after the World Health Organization declares an epidemic a “Global Health Crisis,” the stock market has usually recovered and is on its way back to new highs.

For investors, the best strategy is not to be panicked into selling but to ride out this economic disruption for the next four to six weeks and solely focus on your health and the health of your family.

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