COVID-19's Financial Impact

Both substantial and still to be determined. While the precise long-term impact is uncertain (and will likely continue to evolve for many years), the short-term negative economic effect of the COVID-19 novel coronavirus on the global economy would be nearly impossible to overstate. Only a few weeks into the pandemic, economists have already lowered their assumptions for 2020’s global GDP growth from 3.0% to 2.4%. Even if the final drop is indeed “merely” that reassessed 0.6%, that’s still a 20% drop that equates to several trillion dollars in lost output. The fact is, it would not be at all surprising for that number to be revised substantially downward in the coming weeks and months.¹

Nearly all sectors of the world’s economy have been deeply affected, with hotels, airlines, restaurants and retail stores faring the worst. That’s because much of the damage wrought by the virus has to do with its impact on the public’s demand for goods and services. With perhaps half the world’s population under orders to “shelter in place” (or in full quarantine), billions of people are staying home instead of spending money. Just one example of the impact of the virus on the global economy would be its devastation of international business travel (airlines, hotels and restaurants), which alone is expected to decline more than $800 billion compared to 2019.¹

Source: https://www.statista.com/topics/6139/covid-19-impact-on-the-global-economy/

Severely and still to be determined. In March of 2020, for perhaps the first time in history, the United States experienced a near-full economic stop. An economic stop is the sudden and significant slowdown of the flow of private sector capital into the economy (buying, spending, etc.). As the United States constitutes a staggering one-fourth of the global economy, it’s safe to say that the world will not fully recover economically (from the pandemic) until the United States does. Current projections are that our economy is likely headed for a period of retraction, but even that is not certain as several things, including treatments, vaccines and cures, could result in the economy firing up nearly as fast as it screeched to a halt only a few weeks ago.

While it’s important to remember that the U.S. stock market is not the economy, it is often referred to as a “leading economic indicator.” That means it has historically fallen ahead of economic downturns and has historically risen in advance of broader economic upswings. Unsurprisingly, initial investor response to the impact of the coronavirus pandemic resulted in the Dow Jones Industrial Average falling around 30%, with the March 16th decline of 2,997 points surpassing the previous one-day record decline (set only a few days earlier) by about 645 points. Interestingly, the current market has proven to be somewhat more resilient (than might have been predicted in early March), as investors respond to various announcements such as the CARES Act stimulus bill (signed into law on March 27th), and the influx of positive (and negative) news pertaining to treatments or a possible flattening of the coronavirus infection curve.

Almost certainly, but a precise timeline for the recovery is not yet known. It is our complete, fervent and unshakable belief that both the U.S. and the global economies will fully recover from the economic impact of the coronavirus pandemic. This is based on our experience dealing with the last four economic downturns, our confidence in the overall economic system (especially here in the United States), and our intimate knowledge of the motivations and hopes and dreams of the people we serve. All of this, along with our underlying general sense of optimism, combines to infuse us with the confidence that our economy will recover from the impact of our response to the coronavirus pandemic, and emerge stronger than ever before. Everyone at Allworth Financial believes this in the most uncertain terms.

As stated earlier, the duration of what is transpiring – be it a prolonged recession with drastically higher unemployment, the containment or spread of the virus, the introduction of cures, treatments and vaccines, and how long it takes for us to implement and respond (and whether we respond too quickly or two slowly) – all will impact the speed at which our economy recovers. And while it might not be easy or immediate, we are all supremely confident in our belief that our economy will fully and completely rebound.

It depends. Based on the information at hand, it is impossible to state when exactly the economy will recover. Importantly, from the Great Depression and the stock market crash of 1929, to the burst of the tech bubble in the early 2000s, to 2008’s financial crisis, the domestic economy has not merely always recovered from crashes and corrections and recessions, but each recovery and subsequent upturn (in both the economy and the stock market) has historically lasted longer than the original downturn. Every single time (since 1913).²

While a full economic recovery could either happen quickly (a couple of months), or slowly (a couple of years), or somewhere in-between, the final outcome is entirely uncertain at this point. Again, this is due to constantly changing variables, including how long the pandemic lasts, the introduction of treatments or vaccines, the flattening of the infection curve, or even something that has yet to emerge.

Source: https://www.nber.org/cycles.html

Get a check-up. Because, unfortunately, the turbulence in the market isn’t taking a holiday. Therefore, it’s more important than ever to have your investment allocation precisely dialed in. You can do this by having your portfolio “stress tested” for proper diversification. “Stress testing” is a process in which your investment allocation is evaluated based on how it might respond to historical (or probable or possible) variations in the market. Stress testing could reveal “blind spots” or unseen threats to your investments, savings and retirement.

For those people whose primary savings vehicle is an employer-sponsored retirement plan such as a 401(k), or for anyone who has an IRA, now is a good time to assess the allocation in those retirement account(s), as well. A lot of our first-time appointments are with people who, even though they’ve been putting money away for years, haven’t updated the allocation of their investments in those vehicles since the day they first opened the account(s) a decade or more ago. Be certain you have the proper mix of investments to not only “ride out” this season, but also to maximally benefit when things return to normal. Try not to view your retirement account(s) as merely a savings vehicle. They are investment accounts and their proper allocation could make a big difference in the amount of money you have once you retire.

First, remind yourself that you are not at fault. As a partial, initial response, sit down and create a list of your secured and unsecured debts, bills, monthly expenses, assets, money that is owed to you, income streams, savings, CARES Act benefits, government benefits, employer benefits (if any), and investments. Immediately contact your creditors and seek interest-free delays for repayment, lower interest rates, a reduction in debt principal, and even outright dismissal of the debt. Compile a spreadsheet of how much money you have, how much money you owe, how much your monthly expenses are, how much money you have (or will have) coming in, and then determine if you can afford to retire.   

A sudden, forced retirement is both a shocking and a terrible thing to have to endure. It means different things to different people. For some, it means applying for unemployment, disability or Social Security. For others, it means altering (or, as a last resort, liquidating) investments or rolling over retirement accounts. Others simply can’t afford to retire and will have to return to work in some capacity. At a moment when it’s normal to feel a sense of shock and want to take a step back to mentally and emotionally absorb what has happened, you instead need to spring into action. While you are not alone, it is not too dramatic a statement to say that what you do right now will probably impact you for the rest of your life.

Don’t panic or react out of fear. The very last thing you want to do is to make a sweeping change to your portfolio or investment mix or to jump entirely out of the market. Your immediate goal should be to get your current asset allocation “stress tested” and appraised to help make sure that you are not unnecessarily or unintentionally exposing yourself to risk. This will help you minimize downside risk while remaining in a position to benefit if and when the bull market returns. Your second goal should be to resist succumbing to predatory investment advice telling you to run out and put all your money into things like gold.

Remember, at roughly 11 years in duration, we just exited the longest bull market in the history of the United States. And that bull market actually began when things still looked very dire during the Great Recession. While no one knows when the current market turbulence will end, history (and our experience) has shown us that you should avoid behavioral finance and never try to “time” the market (jump in or out). That is why it helps to work with a fiduciary, credentialed advisor who has your best interests in mind. They can help you make dispassionate, unemotional financial decisions, not just about investing, but about your entire financial situation, all of which should combine to benefit you in the short and the long term.

Enhanced unemployment benefits. Unemployment is state-issued insurance compensation intended to replace roughly 40-45% of your pre-unemployment income. The CARES Act is a federal assistance stimulus bill conceived in response to the coronavirus pandemic and signed into law on March 27, 2020. Included in the CARES Act is a provision for “Federal Pandemic Unemployment Compensation” that is intended to augment your state unemployment benefits by an additional $600 per week for four months.

It’s important to note that to receive federally enhanced unemployment benefits you must have been adversely or directly affected by the coronavirus, but the list and conditions for which the qualification for enhanced benefits applies is not only extensive and far reaching, in order to cover as many people as possible, it’s somewhat open to interpretation.

A government stimulus bill. Signed into law on March 27, 2020, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act stimulus bill, or CARES Act, was created to provide relief and assistance for the millions of Americans who have been impacted by the coronavirus pandemic. The benefits include (but are not limited to), direct cash payments for taxpayers, temporary changes to the rules governing retirement accounts, a suspension of RMDs for 2020, a change to tax laws regarding charitable contribution limits, mortgage forbearance (for mortgages that are insured by the federal government) for up to 360 days, enhanced unemployment coverage, and changes to student loan debt requirements, just to name a few. 

The CARES Act will probably be the first in what could be a series of steps taken by Congress to help individuals (and businesses) who have been impacted by the pandemic, and to assist the broader economy as a whole, to both weather the storm and recover more quickly once the worst has passed and a sense of normalcy and safety has returned.

Absolutely! (Especially in the short term.) Yet, in the middle-and-long-term this is a complex question with several possible outcomes. Certainly, and especially in the short term, with its cash payments, its suspension of things like RMDs and mortgage payments, and its increase in unemployment benefits (just to name a few facets of the new bill), the CARES Act is going to have a positive impact and provide relief for millions of Americans.

A potential downside of such a sweeping and quickly conceived bill is that it could encourage people to take larger-than-needed loans from their retirement accounts, thus triggering a big future tax bill while simultaneously negatively impacting their preparation for retirement. We encourage people to seek help from a credentialed advisor who can work with you to create a plan that enables you to maximize the benefits of the CARES Act while minimizing any negative impact that could result from things like borrowing from your retirement accounts (when there might be other options available to you).