Instead of writing this week’s update, Jill recorded her first ever podcast!
Listen below for the Financial Connections – 2020 April Update.
I’m recording my first podcast from my dining room table. Our staff is diligently working from home to continue responding to your requests. We are spending part of our time listening and reading opinions from various experts. We intentionally try to listen to people with varying points of view about where we are in this crisis and where we are going. Before I comment, I want to define two terms.
Gross Domestic Product or GDP is the measure of economic activity. Recession is defined as two successive quarters of negative growth.
With that in mind, our newsletter shared how Vanguard is viewing this recession as a sharp decline before rising quickly. It is called a V shape recession because the drop is quick but the recovery is quick. Alternatively, JP Morgan feels it will be more of an elongated recession meaning the economy drops and then languishes for a while before starting upward. It is not quick. This is referred to as a U shape recession.
And how deep the recession becomes also hinges on Congress’ ability to pass legislation to help Main Street USA. The CARES legislation recently passed should just be the beginning. More is needed.
I think it offers perspective to look at previous recessions. The average, according to Blackrock, the world largest asset manager, the average recession lasts 13.3 months. For some perspective, the 2007-2009 recession lasted 18 months.
I think the length of time of the recession will have a direct correlation to COVID-19 and our ability to put it behind us. The longer it takes, the longer the recession before economic recovery takes place.
One of the things we ask ourselves is what will the work look like when we recover from the recession. When an economy recovers from a recession, it moves to what is called an expansion of economic growth.
We’ve written many times about how long this last expansion was after 2009. To put it into perspective, the average expansion is 60.3 months – so a little over 5 years. This last expansion was 126 months – or 10.5 years!
On a more local level, California is the largest economy contributing to the U.S. GDP – it comprises 14.6% followed by Texas at 8.9% and New York at 8.1%. It is obvious that the sooner we gain control of the coronavirus, the sooner the economic engine picks up speed.
While some parts to the economy are in terrible shape, other parts are quite active.
Examples include pharmaceuticals, consumer staples (think toilet paper), food and grocery industry as well as beverage makers. Technology companies involved with the internet, communications, social media and utilities also benefit by our staying home.
We’ve heard about Amazon planning to hire 100,000 workers. CVS plans to hire 50,000 workers, Add to that Walmart wanting to hire 150,000 workers. GE Healthcare is trying to hire people to expand their ventilation manufacturing production.
Banks are in a much healthier position than they were during the Great Recession so that is good news.
One article published by the Capital Group, you may know them as American Funds said: “There will be a global baby boom that emerges from the quarantines and social distancing. My advice: Buy diaper companies.” We assume their funds will include this theme!
I think it is also helpful to consider the international situation such as the Eurozone. While they may have a common currency and monetary policy, their fiscal policies are not united. In the U.S. fiscal policy is still set by Congress. This is a concern for Europe’s economic recovery.
As we listen, learn and sift through information, we are developing our own approach to what changes should be made to your portfolios as our world changes. The “we” I refer to is Brian, my business partner, Jenny our Director of Financial Planning and Flavia, our Business Manager.
For instance, we are altering some of our bond line-up to reflect interest rates being essentially zero and likely to be so for some time.
We are considering overweighting the U.S. over international going forward. And, we want exposure to managers who select investments in this new normal instead of overemphasizing a passive or index strategy that owns the good, the bad and the ugly.
We are still in the developing stages challenging our assumptions among each other, bringing our different points of view to the table, looking at risk, return, correlations between funds and so on.
At some point we will rebalance your portfolios as we always do but want to better define what to rebalance into going forward.