We have been closely tracking the data associated with the COVID-19 coronavirus and the impact it has had on the global economy and markets. At BWFA, the health and well-being of our employees is a top priority. We have already implemented several procedures at our office to limit potential exposure to the virus and ensure continued normal business operations. Our thoughts and well wishes are with everyone affected by COVID-19.
We continue to monitor the capital markets closely and analyze the implications for the investments we have made within our client portfolios. Last week President Trump banned all incoming travel from Europe to the U.S. for 30 days. This excludes Americans that have undergone extensive screening and tested negative for the coronavirus. Travel bans on other regions and countries are likely to follow. We can only hope this is the first step in a well-thought-out strategy to slow the spread of the virus into the U.S.
As testing increases across the country, we expect there will be a significant increase in reported cases. We expect this spread will give rise to increasing local or regional quarantines to slow the spread in and from those affected areas. It may be that, as a nation, we follow in the footsteps of Italy and France and ask everyone to self-quarantine for a period. In this event, our operations will continue to function normally, as all our people have remote access to all systems and procedures.
The financial and monetary authorities across the globe are providing ample liquidity to enable the continued smooth, though currently volatile, operation of markets. We expect governments around the world will begin to coordinate their efforts in order to help contain the virus and then help economies to more quickly recover from the economic supply and demand shock we are experiencing.
No one knows how long it will be until we see a peak in new cases. However, we can surmise that if many of the bans and restrictions continue, the short-term economic toll will none-the-less be substantial. This probability is now being discounted into markets, which have experienced increased volatility with equities declining some 25%-30% from their recent highs.
How far might markets drop? Again, no one knows for sure. However, we do not believe the economic malaise will be as severe or long lasting as either the 2008 Financial Crisis or the 2000 Tech Bubble. The U.S. has eliminated most of the pre-conditions that led to those declines. The economy is strong outside the short-term impacts from the virus, as the recent jobs and wage data indicated. Banks and financial institutions are also much better capitalized. Real estate markets are generally healthy, corporate earnings are at high levels, and interest rates, inflation, and taxes are low. Financial markets remain liquid and orderly and stock valuations are more reasonable, particularly after the recent decline.
Perhaps the biggest difference is that we believe this crisis will be relatively short-lived. Unlike 2000 and 2008 which took many years to recover, this crisis, if the correct steps are taken, should see a sharp and quick rebound in the U.S. economy, as the number of new cases starts to decline, more similar to the decline and rebound we experienced during the influenza outbreak in 1997-98.
The stock market should begin to react positively when investors can see the proverbial light at the end of the tunnel. Oftentimes this shift in sentiment comes in unison with some material good news (i.e., discovery of a vaccine, or a drop in the number and severity of cases). We believe this could be weeks or months away, but not years. If we are correct, a market recovery could happen quickly once it starts.
Our firm has been through several extreme market fluctuations and worldwide events over the past 30 years, and we have weathered these together with our clients. We are diligently analyzing each of the companies within our client portfolios to ensure they have the future cash flow reserves necessary to withstand the market stress, while keeping our eye on the long-term investment time horizon.
The coronavirus crisis is unprecedented.
But so is the U.S. response. And quite frankly the world.
There could very well be more downside.
But there’s no doubt that the U.S. economy will emerge stronger than ever before.
And the opportunities that will be ushered in with the inevitable bull market that follows are likely to be epic. We need to be realistic but also be optimistic about our future.
Robert G. Carpenter