Recession, not Depression, Looms as Congress Enacts $2 trillion Emergency Stimulus Bill
Congress and the US Senate are 24 hours away from voting in favor of a $2 trillion stimulus bill, equivalent of 9% of last year's US GDP of $21.427 trillion. We don't know the final details yet. Rather than us compiling the information while facts are in flux, we will simply point you to a couple of articles that give a broad outline:
5 Key Things in the $2 Trillion Coronavirus Stimulus Package
What to know about the $300 billion-plus for small businesses in the stimulus bill
US Stocks Rally in Anticipation
After falling 33.9% in 4 weeks from the all time high set February 19th, US stocks today recorded the first back to back gains in a month - 10.6% above Monday's low, but still 26.9% below the record. Stocks will have to gain another 36.8% to make new highs. That's typically 4 years worth of average stock market gains, but as we saw after March 2009 and after December 2002, three years is more typical to recover big losses like these. After the stock market fell 20% in December 2018 stocks made news highs within 4 months. After the October 1987 stock market crash, stocks made new highs within 18 months. How US stocks perform over the next three years is dependent on whether we have a recession (defined as two or more continuous quarters of negative growth) or a depression (an economic downturn that lasts years, last seen 1929-1933.)
We will expand our thoughts over the following weeks, but here are the highlights:
The worst of new cases and deaths is yet to come. The US is about one month into the cycle seen by other countries. China and South Korea have seen dramatic declines in new cases and deaths after two months of aggressive social distancing. Italy, Spain and Iran are showing a modest decline the rate of increase in new cases and death, rank at the top of the charts for deaths per million population. New York State is seeing a modest reduction in growth of new cases after 10 days of semi-enforced quarantine. Louisiana has surged to the front of US states, with many cases traced back to Mardi Gras exposure.
Deaths in US so far are 908. We expect the number of deaths to grow to tens of thousands within weeks.
South Korea and Germany have had relative low death rates for a couple of reasons. Aggressive early testing; general trust of the population in government; advanced (and universal) healthcare systems. As these factors are missing in the US, we can expect much worse outcomes, expect the worst of the pandemic to stretch out over four months instead of two.
We expect an unemployment rate of 20% by April, second quarter economic growth to fall 10%, S&P 500 earnings to fall way more than the current projections of -3.9%.
We expect another $2 trillion stimulus plan will be needed later this summer.
There are now three president, Herbert Hoover, George W. Bush and Donald Trump, all Republicans, to deliver negative stock market returns during their time in office. Of the last 7 presidents, Obama delivered the highest stock market returns followed by Clinton. Can we finally explode the theory that Republicans are better stewards of the economy than Democrats.
George W. Bush is currently ranked 33rd (out of 44 presidents) in the most recent poll of presidential historians; Hoover is ranked 36th. Trump is ranked 42, behind only James Buchanan (43rd), who allowed the US to slide into Civil War in 1857-61, and Andrew Johnson (44th, 1865-69), who succeeded Lincoln but was subsequently impeached for restoring the seceded states to Union without protections for formerly enslaved African-Americans.
With all this bad news, why are we still holding stocks? All of this bad news and more is already accounted for in the 30% sell-off. As we have counseled many clients this week, we're not worried about whether stocks fall another 5 or 10% in the weeks to come. We're worried about not being invested when the news turns better, and stocks rocket higher.
It seems so logical that "we would should go to cash now, get in later when things look better." Here's the problem: The market ALWAYS anticipates things getting better long before that actually happens. So what we're saying when "we sell now, buy back later," is that "we want to sell low now, buy back later at much higher prices." Only 2% of investors, in our experience, have the discipline to "buy low now, sell high later" when the market is focused on good news.
For the 1/3 of our clients that are depending on their portfolios for their monthly draw, we will distribute that draw (unreduced) April 1st as scheduled. Monthly draws ALWAYS come from cash and short term government bonds, and we typically have a 12 month supply. We have another 4 years of cash flow in corporate bonds. Corporates got pretty roughed up over the last month, but we expect that market to recover given how low government bond yields have fallen.
For clients that are not retired yet but who have been truly worried about the state of their portfolios, we sold some stock positions this week and last ONLY in taxable accounts, invested the proceeds in bonds. For the most part, assets in 401Ks and IRAs won't be touched for 5, 10, 20 years - long after this crisis is over. Those accounts we left invested in stocks according to the client's overall allocations. Without investing in stocks now, capital won't grow enough to fund your retirement later. The risk we need to concentrate on is not volatility now, but your longevity to come.
Important Health Warning:
Donald Trump and certain Republican governors and economists "want to reopen the economy by Easter." No doubt many states and people will follow this advice and, just like the couple in AZ who took chloroquine following the president's advice last week, they will die. For the communities that will gather in large groups for Easter and Passover coming up, all we can say is "This must be God's (or Darwin's) way of thinning the herd."
We have always thought that Trump was a dangerous buffoon - how can this nightmare end? For the sake of your family's health and for the sake of your portfolio, vote Donald Trump and the Republican Senate out of office November 3rd. We intend to keep working from home through June 1st at a minimum, and we WILL vote, even if by mail in ballot.
If you would like to learn more about how we advise our clients, visit HeronWealth.com or schedule a call with me.
Best regards,
David Edwards, President
Heron Wealth
www.HeronWealth.com
Direct: 347 580-5288
Mobile: 917 705-3893
Enjoy my videos!
The Basics of Investing for Retirement – 24 minutes
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