US economy expected to plunge by historic 30% due to devastating virus impact

[Jungibaaz]

Question: Of those who have lost a lot in stocks lately... are they going to recover their losses fully once the economy bounces back fully, say, in March 2021 or that because they lost the time of one year they will still lose over their stock's (and their) lifetime over-all $$?

I'll break down this answer in to two parts. A) directly address your question, and B) to elaborate around the subject, and add to what @Nilgiri has already rightly said.

A) They will recover, eventually. When the market takes a hit and stock values go down, you lose money the same way you lose it on any asset. E.g. you had x number of stock in multiple companies worth USD 1m, market takes a hit you might be left with stock worth USD 0.8m, but you still own x number of stock in those various companies unless you decide to sell. Same way when an economic downturn happens, you can own an asset such as a house or a plot of land, it can decrease in value in a bad year, but generally over the course of time it should increase in value if the conditions are right.

B) Now on an aside, the real reason why stocks are looked at so keenly, besides all the rich and their money, is that stocks reflect the health of the companies listed on the exchanges. Therefore they're a reflection (albeit a loose reflection) of what's going on in an economy. And stocks and financial securities are usually first to react to any new development. So for example, when coronavirus hits, or a new development occurs in the story, stocks react immediately, bond values react immediately and so do exchange rates. In the same way, if a major natural disaster might happen, stocks react immediately. Only later and with varying delay will GDP growth and house prices etc react. And the last reason is that generally speaking, stocks and markets are usually the catalysts for major downturns, banks are systemically important institutions that need to keep functioning. And they have on their balance sheets assets including stock and bond holdings, as well as other priced and traded securities etc. When markets seize and values go down, banks will have a lot of trouble finding liquidity (simplified explanation of liquidity; short term cash that banks need to keep operations and ATMs running), and if the value of it's assets goes down so much that their value is less than that of their liabilities, a bank is basically insolvent. So when major crises have happened in the past (2007-8, 1933 etc.), usually stocks and financial securities go down first, then we see liquidity issues in the markets, then usually some banks will face trouble and some might go down, after that the economy shows the damage but with a delay. That means that sometimes, some crises that start with stock market crash, will eventually lead to widespread economic damage, unemployment etc.

On a last note, stocks of course go up and down all the time. So what's different this time with Covid-19?

Well, for one we can all see that this latest crash has been seen in every market and it has been record-breakingly massive. The other thing is, and this is what you learn talking to bankers and traders, we're also seeing huge liquidity issues. It's one thing for stocks to lose a bit of value, another thing for all liquidity to dry up, the latter is what's seen in a major financial crisis.

 

[49savage]

Its been awful, and not just from an health and economic perspective either. All sports have been canceled or delayed, including now the Tokyo Olympics. All movies have been delayed. My 2 week vacation to Hawaii in July has now been put at risk. And I was planning to travel to Egypt and Jordan the first couple weeks in December. I can only pray this virus will be under control by then. This virus is ruining billions of peoples lives.

Mannnn that sucks! Hawaii would have been a nice getaway from all this madness. Truly a nightmare. My mailorder bride/fiance's k1 interview was pushed back until further notice because of this bs. Stuck at home and alone haha.

The NBA playoffs were right around the corner, I swear they sabotage the lakers as soon as they see that we're going to win a championship lol.

 

[Nilgiri]

Dude, many analysts were predicting a recession soon, now that corona hit we might have a big recession but then again this would mean a fast recovery afterwards no?

Yes its fairly liquidity-sentiment driven (i.e fear of the unknown + lack of info)....rather than deep structural problem in the economy.

Once more info is known about this pandemic + solutions + operating compromise/balance arrives etc it will be baked in more to the economy and it will respond to the throttle inertia. This is basically a fairly well understood brake action going on now (caused by removing/slowing people from previous productive activity, human resource is the single largest factor of production after all) rather than some more unknown interior undermining condition (that economists have to figure out or make new/better theories about etc and convince politicians for policy action etc...while the system gets worse like during great recession for example).

But the recovery could either be U shaped (slower) or V shaped (faster)...it is very hard to predict that now....depends on the nature/speed/efficacy of introduction of the solutions + information etc. Those are still being figured out for most part.

Gilead for example has a possibly pretty effective antiretroviral drug...but its stocked very low (its previous use was very specific), its patent is in action (its new IPR, not a generic) and mass production of it has to be researched and implemented etc etc. They are getting around this by prioritising distribution of what they have by their own triage + a compassionate supply condition as well.

But it gives an idea of the lag period of even a possible (short to mid term) solution relative to the nasty geometric progression that is inherent in this specific virus contagious factor. The only long term solution is an effective vaccine of course (with robustness to handle future related mutations/strains).

So can we say that in a way the virus has also its positive sides?

There are silver linings for sure long term. World supply chains factoring/pricing in the systemic issue present in the Chinese govt's autocracy (given what happened in the crucial time period relative to what other govts would have done)...hedging more (esp for critical supply industries) compared to before...so far as the source of the mess-up does not change etc.

This will see more localisation and hedging in various sectors and better response to another pandemic down the line.

But action of turning the economy switch off and then on again....is not really going to have a huge positive impact overall. It not like heart defibrillator to jumpstart to something bigger etc....but rather very slow action stuff (hence why innovation for productivity leap takes so much time + resource commited to it to get just a few % better etc once you are near or at frontier of overall human development).

This will have negative impact on many people (purely economically...who knows what the final health toll will be) for this year and next...and maybe longer. We will have to see.

 

[CrazyZ]

Numbers on a paper. Things will rebound by the end of the year. We need a time out. Whole world should just skip reporting economic figures for the next few months.

 

[niaz]

a) You don't lose in stocks if you don't sell but wait it out (esp if you are invested long term and hedged broadly like you should be). If you have no pressing liquidity concern (personally + family) you should never sell stocks lower than you bought them, period.

b) Such selling (short) are for people/companies/funds that are making more deeper plays using opportunity cost speculation algorithms and the like (so they can buy at low bottom and sell on way up later). Regular small investors should not be influenced by that volatile lemming parade too much unless you know what you are doing (day trading experience - and even then I would not advise as there is extra heavy volatility compared to normal daily situation).

c) Rebound will happen (given fundamentals are strong in mid term), just matter of when. So patience till then is imperative.

So people that have life savings/social security plans like 401(k) with say heavy stock indexed options etc need not worry as those are longer term stuff that will see through this dip.

The problem for a small investor is one specific small group of people: if you were extra reliant (because you didnt hedge/save well in other strategies/portfolio) on your 401(k) plan and you are retiring soon (this year or next for example) and really need that liquidity right away this year or next for some reason. It's very small number of people.

The biggest group of people affected are not invested in stock market (directly) at all, but the large number of paycheck to paycheck working class...that are extra reliant on economy doing well and liquidity flow being as normalised as possible. The severe contraction there means they need support from govt temporarily...or the govt cannot restrict/contract economy by shutdowns as much or as long (say developing country especially). Its a balance in the end...each country needs to find what works best for its own particular situation and setup.

@Socra @Jungibaaz @Chak Bamu @That Guy @waz @WAJsal @niaz @farhan_9909 @jaibi @Vergennes @KAL-EL

Both I and my wife have a substantial investment in "ISA". This is a fund where one is allowed to invest a certain amount with an authorized agency (bank, building society or an investment fund) each year. You don't pay income tax or capital gains tax on ISA funds but the maximum amount one can invest is announced annually at the start of the tax year. ISA had been doing quite nicely for the last few years but must have dropped a lot in value by now. We would not know by how much until we receive the biannual valuation statement sometime in July.

You are quite right that you don't lose unless you cash in the stocks, but it assumes that one has deep enough pockets to survive without the need of touching your investments. When I was working ( during 2008-2009) crash; it did not matter because the ISA savings were not touched and the value bounced back. Now the case is different because my pension does not cover all of my expenses and the consultancy has dried up. I need to cash in some of the stocks whenever the need arises. I, therefore, consider this drop in value as 'Real loss'.

 

[PakFactor]

@Nilgiri @Meengla @niaz

This is also where it becomes tricky a lot of corporations would invest all your money into a specific fund (ETF or Mutual Fund) be it 401K, Roth/Individual IRA, etc., and fail to keep cash on the side. I have always followed a 70/30 split have $ 70 of every $ 100 invested and during a down turn like you are seeing now deploy the $ 30 to the fullest and ride the wave up. During that time rebuild the 30% cash.

 

[Meengla]

Thank you all very much! I think the above posts help.
Another question: If one has cash sitting in banks, say, $100,000 Savings account, then is this the good time to invest? If so then what's the best way forward?
I am a damn financial rookie!!

 

[CrazyZ]

Thank you all very much! I think the above posts help.
Another question: If one has cash sitting in banks, say, $100,000 Savings account, then is this the good time to invest? If so then what's the best way forward?
I am a damn financial rookie!!

Investments are for zombies. All Americans need is toilet paper, a shotgun, and a four wheel drive.

On a a serious note. Now is a prefect time to invest for a long term investor. If you don't own a home I would start looking into it. Or you should consider an SP500 index fund or ETF.

 

[t1000]

Yes this is the best time to invest provided the markets remain open.

 

[Nilgiri]

Thank you all very much! I think the above posts help.
Another question: If one has cash sitting in banks, say, $100,000 Savings account, then is this the good time to invest? If so then what's the best way forward?
I am a damn financial rookie!!

Simplest way for rookie to make some profit from dip now (above your solid retirement plan etc with extra liquidity you have)....is likely oil/energy ETF.

They are hedged (so you dont need to worry about specific oil/gas company) but somewhat specific to reliable sector that will rebound from KSA-russia price war later this year or next year. You dont have to worry about checking too much and micro managing etc...can just check at your leisure as oil/energy prices rebound whenever that is (probably wont be for a while).

Googling this will give you more info on it, and then you can have chat with say a finance advisor at your bank etc.

ETF (in general) is really way to go for rookie....you are not getting too specific or too broad basically.

Ameritrade and other online broker websites like that will also throw in free relevant advice with an account there I believe.

 

[H. Dawary]

I wonder if we Afghans can claim this victory, the same as the Soviets even though we had nothing to do with their collapse.

 

[zectech]

United States is a giant and when it goes down it will take down all of us.

The rest of the world should become their own central bankers, on their computer screen invent trillions in world currency to lend out and buy up the world. The Federal Reserve is doing this. Why not ever nation being their own central bank. Let every human do this too!

 

[Meengla]

Simplest way for rookie to make some profit from dip now (above your solid retirement plan etc with extra liquidity you have)....is likely oil/energy ETF.

They are hedged (so you dont need to worry about specific oil/gas company) but somewhat specific to reliable sector that will rebound from KSA-russia price war later this year or next year. You dont have to worry about checking too much and micro managing etc...can just check at your leisure as oil/energy prices rebound whenever that is (probably wont be for a while).

Googling this will give you more info on it, and then you can have chat with say a finance advisor at your bank etc.

ETF (in general) is really way to go for rookie....you are not getting too specific or too broad basically.

Ameritrade and other online broker websites like that will also throw in free relevant advice with an account there I believe.

Well, based on the advice given in this thread, today I opened an Ally 'Managed' Investment account and transferred some funds to that from my Savings account. I think the money will be put into the investments/stocks in 2-3 days; but already cursing myself for opening the account when the stocks are rallying today?! Would have been better had I opened the account 3-4 days earlier? And would have been worse had I waited 3-4 weeks later?

In your's and others responses, you don't have to sugar coat that I have just made a wrong choice. I am a rookie and there is no financial adviser.
TIA!

 

[Nilgiri]

Well, based on the advice given in this thread, today I opened an Ally 'Managed' Investment account and transferred some funds to that from my Savings account. I think the money will be put into the investments/stocks in 2-3 days; but already cursing myself for opening the account when the stocks are rallying today?! Would have been better had I opened the account 3-4 days earlier? And would have been worse had I waited 3-4 weeks later?

In your's and others responses, you don't have to sugar coat that I have just made a wrong choice. I am a rookie and there is no financial adviser.
TIA!

No worries about the timing of (smaller unpredictable) rallies/dips within this (larger) major dip period. You have to get in at some point and there will be recovery later...it wont be much % difference by small timing difference loss/gain compared to the larger gain that will happen down the road.

I feel the larger dip period is largely going to reflect the shutdown period overall (could be around 2 weeks - 6 weeks in best intel I have)....so you are fine. Earlier is better given more information increases with time and the market will start to climb (in general).

 

[Meengla]

I feel the larger dip period is largely going to reflect the shutdown period overall (could be around 2 weeks - 6 weeks in best intel I have)....so you are fine. Earlier is better given more information increases with time and the market will start to climb (in general).

Thanks a lot!! It's reassuring.