It is Sunday afternoon, March 15, 2020, and Elaine and Scott have just come from a Celebration of Life a long-time friend who passed away due to a heart attack at an age that was too early. It reminds us of what is important in life and even in tough times, how important it is to make the most of each day.
The Coronavirus has impacted the world much more than previous diseases. Having said that, we do believe sometime later in the year, life should return to normal and the Coronavirus concerns will have subsided.
We see that there are currently three significant issues that are occurring simultaneously:
- Supply shock
- Demand shock
- Oil shock
Let’s discuss each one of these.
Supply Shock
The rate of new cases of the Coronavirus in China is slowing, which is a positive sign for the world. But, the number of new cases is rising in most other parts of the world. South Korea and Italy are countries especially hard hit by the virus. In the US, Washington, New York and California are the states with the highest number of cases. The number of deaths in the US has reached 681 per USA Today at 8 PM Pacific. To put this in perspective, the CDC reported that 80,000 people died of the flu last winter in the US, the highest death toll in 40 years1. The closed factories, especially in China, have created a shortage of products and parts that are shipped to the US and other countries around the world.
Demand Shock
Around the world, unprecedented steps have been taken to shut down industries and businesses to stop the spread of the Coronavirus. In the US, examples of closures or dramatically reduced business include:
- Cruises cancelled till May
- Airline flights including stopping flights of foreigners from Asia and Europe to the US
- Domestic travel by many companies
- Professional Sports, including the NBA, NHL, MLS, XFL, MLB and PGA, games cancelled or delayed
- NCAA March Madness Basketball Tournament cancelled
- Boston Marathon was postponed
- Premier Soccer League in England delayed
- Theme parks around the world closed
- Live TV shows are eliminating audiences
- Hollywood and the film industry shut down
- 14 Las Vegas casinos will close starting this Tuesday
- Some K-12 and Colleges around the country are closed for about a month, including the public schools in Santa Clara County
- Conventions are cancelled, including South by Southwest in Austin Texas
- Music Festivals are cancelled
- Santa Clara County has cancelled events in the San Jose Area for the rest of the month
- Governor Newsom announced all bars, wineries, breweries and nightclubs closed and reduced occupancy at restaurants and movie theaters.
- And more
While these cancellations affect all the people in these businesses and industries, there is a significant ripple effect on related businesses, such as restaurants around theaters and arenas. What is unclear at this time is how long these companies and businesses will remain closed and how long it will take them to get back to levels prior to the Coronavirus. Most economists see some reduction in Q1 2020 and extending into Q2 2020.
Today the Federal Reserve cut short-term interest rates from 1.0 to zero and are starting a Quantitative Easing policy to buy $700 billion in government and mortgage-related bonds as part of a wide-ranging emergency action to protect the economy2.
A big question is how many people will lose their job as a result of all these actions and how much will unemployment rise over the next 6 months in the US. Also, with schools closing, will this cause some parents to have to stay home from work to watch their kids, putting further stress on families.
We were at the grocery store over the weekend. There was a run on items like toilet paper, pasta, eggs and canned goods. (See photos below.) The aisle with cold remedies, products was well stocked. Very odd. The line to get into the Costco in Sunnyvale stretched around the front of the store with people waiting to get in to buy toilet paper.
Oil Shock
The reduction in demand listed above has resulted in a lowering in the demand for oil worldwide. To counter this, Saudi Arabia asked Russia to reduce their production of oil, like the other countries in OPEC. Russia refused to reduce their oil production and Saudi Arabia responded by increasing their production and driving the price of oil down to about $30/barrel.
This puts pressure on US oil producers because much of their production costs more than $30/barrel to get the oil out of the ground. It leaves the US oil producers with the option to continue to produce oil at a loss, but still bring in some revenue and keep their workers employed. The other option is to shut down production and lay off their workers. Neither option is very desirable.
Summary
So where do we go from here? We think the next few months will continue to be challenging and the volatility in the stock market will continue. We have reduced risk in client portfolios to help stabilize them. We have created our buy list and look forward to when the market starts going back up without the need of so much Federal Reserve pumping.
In the meantime, this may give you an opportunity to do things around your home that have been on your to do list. You can read a book you have been wanting to read. We think it would be wonderful if everyone takes the opportunity to do something nice during this period (if not longer) for people you know and people you meet.
Everyone is stressed-out so a little kindness will feel like a breath of fresh air.
We hope you and those you care about stay healthy and safe. The CDC lists some ways to protect yourself to avoid getting the Coronavirus3.
If you would like to discuss the market and our strategy more with your advisor, please give us a call at 408-963-2858.
Take care,
Elaine, Scott and Linda
References
1 USA Today Article: Coronavirus live updates
2 Washington Post Article: Federal Reserve slashes interest rates to zero as part of wide-ranging emergency intervention