If you’re an investor, the chances are you’re currently feeling distinctly nervous. Despite a global market which, overall, is doing considerably better than most people expected when the COVID-19 pandemic took hold in mid-March, the US economy is currently shrinking faster than at any time since 2008. The Federal Reserve has dropped interest rates close to zero – bad news for cash savers – and it’s widely thought that the economy could contract by another third this month. What can you expect to happen to your investments, is it worth making new ones, and how long is the current crisis likely to last?
Understanding the pandemic
This is the first full–scale global pandemic we’ve experienced for a century, but there’s still a lot of information out there about previous ones, and putting that together with what epidemiologists can tell us about COVID-19 makes it possible to come up with realistic predictions and strategies. The first thing to understand is that this isn’t like a terrorist attack or a localized epidemic – it’s not a short sharp shock but something that will keep on affecting us over time.
Talk of reaching peak infection doesn’t mean that the problem will soon be over because if the curve has been successfully flattened, that peak could last for days or weeks. While it may be tempting to rush to reopen the economy, ending lockdown could give the virus an opportunity to spread much more aggressively, undoing the progress made to date. We’ve had a bit of luck in that it doesn’t seem to mutate as readily as most viruses, but there’s still a significant chance that further dangerous strains will emerge in future years. If we don’t prioritize tackling it effectively now, we might have to deal with it over and over again.
What a crisis on this level does is to expose weaknesses in the economy. If we’re smart, we can address those in ways that will make this kind of crash less likely. What’s needed, as Alex Friedman has observed, is sustainable growth. The just-in-time economy lacks the capacity to cope when things go wrong, and the real economic precarity with which many Americans live day to day means that vast numbers of them slip easily into bankruptcy or see their small businesses collapse. This has knock-on consequences for larger businesses, depriving them of customers and breaking supply chains. As investors decide where to put their money, they need to take these vulnerabilities into account.
Adjusting to a bear market
After 11 years of bull market, there are many investors who don’t know how to deal with anything else, and part of the instability that we’re seeing at present is simply a result of panic and bad decision-making – something that will stabilize in due course. That is understandable – seeing the value of your stocks drop is frightening, especially if you depend on dividend income. It’s difficult to be certain which companies will survive. If it avoids actual collapse, however, what goes down must come up. With this in mind, a bear market can be a great time to invest – just do your research carefully first. Picking up what other people are ditching at low prices could put you in a very nice position in a few years’ time.
The falling oil price has scared a lot of people because we tend to see oil as the cornerstone of the economy, yet a lot happens without it. Many people are predicting a surge in renewable energy stocks after the immediate crisis is over because of the probability that several countries will offer green stimulus packages, taking advantage of the situation to restructure their economies and diversify their dependencies. In the meantime, no matter how tough things get, there are some sectors that offer security because people will always need what they produce: food, drinks and other basic consumables. There is also a boom in the medical supplies sector which can be expected to outlast the crisis by some months as healthcare centers endeavor to rebuild their stocks.
Considering your position
if you’re a young investor and unlikely to need to draw on capital for the foreseeable future, now is a great time to put your money into stocks whose value is likely to grow over the long term. The trick is to buy just as things start to look better but before everybody else realizes that the crisis is coming to an end. If you’re older, however, the situation presents greater difficulty. Most experts recommend that, in this situation, you hold tight and try to resist panic selling. As long as you have a reasonably diverse portfolio, this approach will probably leave you in a better position than selling up, after a couple of years.
Times like these create economic instability but, over time, patterns emerge, and paying attention to those patterns is all you need to do to recover a degree of control.