How is COVID-19 Affecting the Economy and Markets: a FAQ

With all of the gyrations in the stock market, I’ve been getting a lot of questions on the global health pandemic and how that is affecting the economy and the markets.

I’ve compiled a list of questions that are coming up most often.  I’ve answered them from the perspective of experiencing the 2001 Tech Bubble and the 2008 Financial Crisis.

FAQ # 1: How are rate cuts supposed to help against this global Pandemic?


A: Central Banks lower their short term lending rates to allow businesses to get loans at rates they can afford. So when the economy is bad like this, the low-interest rate loans allow businesses to pay their short-term operating costs so they can stay in business during this crisis.

FAQ # 2: Why are the Rate Cuts not helping?/Why is the Stock market still crashing?


A: The rate cuts will help out over the long-term; once we get to the peak of the infections and we start to #flattenthecurve. But before we get there, there will still be a lot of workers that have to stay home, not earning income and also not buying anything.

Since our economy is heavily skewed towards the consumer, this has a lot of people frightened about stores going out of business. This is affecting the stock market in the short term because of a lack of confidence.

Confidence and trust are at the heart of investing in stocks – you have confidence that this company will do well in the future and pay you part of their earnings by way of dividends or growth. If many people lack confidence at the same time, the stock price will fall.

FAQ # 3: Why is everyone saying now is a good time to buy? And is it true?


A: Maybe. It is true that the stock market is on “sale” right now. Capital markets are future predicting machines – but they only predict 3-9 months ahead. So right now, they are predicting that in 3 months’ time, the economy will be in worse shape (because of lack of demand, supply chain disruptions).

The thing to keep in mind is that businesses can be adapt – once we know what to expect. In WW2, auto manufacturers stopped making cars and started making engines for military equipment. So our businesses can adapt.

However, the stock market can drop still lower before things turn around. So if you don’t have the stomach for these crazy swings, it’s ok to wait until we get more clarity before you invest.

FAQ # 4: I’ve heard that the Fed is “out of tools” to fix the economy during this pandemic. Is this true?


A: The economy is affected by both Monetary policy and Fiscal policy. Monetary policy is the Federal Reserve and other Central Banks cutting or rising interest rates.

Fiscal policy is the overall government’s spending policies. These include things like Unemployment benefits, taxes, and even Universal Income.

In a crisis, both types of policies must work together to fix the economy. We can’t rely on just one to solve the economy now.

FAQ # 5: The market swings up & down are worse than they were in 2007-2008. Does this mean this downturn is worse than the Great Recession?


A: It’s too early to tell that yet. However, one thing to keep in mind is that over the last 11 years, the stock market has developed many automatic computer-driven trading programs. These are all based upon algorithms that instruct simple “IF: THEN” commands. Like, if the market goes down by 5%, then sell X amount. Or if the market goes down by 7%, then buy Y amount. This is one factor.

Another factor is the amount of passive investing tools. All the Index funds and ETFs that own a bit of every company. Generally, they are good in that they allow everyday people to participate in share-ownership, but this time, they do have a downside. Because they own a bit of everything, if someone wants to sell their index fund, the fund has to sell a bit of everything as well. So all industry sectors are affected. Also, there are some stocks that don’t trade all that much, or they haven’t issued that many shares when you sell those shares, there is a bit of a self-fulfilling cycle of low prices causing more low prices.

So the swings might be a reflection of these “technical” factors and not so much on “how bad it really is”.

FAQ # 6: I’m getting different advice – some people tell me not to sell my investments, some people are telling me this time is different than previous downturns, so I should cash out. What should I do?


A: My recommendation is to stay the course if you are invested in a board based investment like a mutual fund or index fund. If you are invested in single stocks, it is important to analyze what kind of support the company might be getting to weather this storm.

Is this time really different? Yes and No. Every market downturn is different in its circumstances. In 2001, it was tech, in 2008 it was banks and mortgages. This time it’s a virus. But human behaviour is very consistent. It’s very predictable that during scary times, people want to stockpile and they want to seek safety. But in good times, they want to enjoy themselves, they want to eat out and entertain themselves.

There will be an end to this pandemic. Asian countries such as Singapore, South Korea shows us that this virus can be contained. When that happens, shops will reopen and people will go out and spend money, buy things and pump the economy back to life again. When this happens, the stock market will start to also go up again. This is why staying the course is the prevailing advice.

FAQ # 7: With this stock market meltdown, should I still be contributing to my retirement funds?


A: If you have some savings in cash that can get you through the next couple of months, then continuing to contribute to your retirement account can be a good move.

The reason is “Dollar-Cost-Averaging”. While buying a little bit during up times and a little bit during down times, we can average out our costs. Without having to worry about buying too high or having to time the market, we can let the regular contributions smooth out the purchase price.

If you don’t have savings on hand and have a precarious job situation with the pandemic, stopping the contributions can give you a cushion to keep up with bills. When the job situation gets more stable, re-starting the contribution then will still give you time to reach your retirement goals.

Stay Tuned and Sign up for more updates during this turbulent time.

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