Economy and Markets in Uncharted Territory

Uncertainty, fear, a global pandemic, and economic disaster weigh heavily upon the markets
March 24, 2020 Updated: March 24, 2020
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Commentary

The U.S. economy is, to put it lightly, in deep and vastly uncharted waters.

And it’s not just the stock or bond markets that may be on their way to oblivion, but our entire economy and way of life seems to be hanging by a thread. Everything we thought we knew was certain and enduring two months ago, now seems obsolete.

The New Reality Is Still Largely Unknown

Given that new reality that consists mainly of massive dislocations and uncertainty across every sector of the economy, where can we expect the market to go from here?

The truth is, we really don’t know how this is going to end.

Will the markets be fundamentally changed from the pandemic, or have they just been shaken and disrupted for a short while?

Are we looking at the front end of a stock and bond market catastrophe that’s bigger than we ever imagined?

The Dow has shed 11,000 points off its high, giving up all of its gains over the past three years in under three months. As a result, some of the top companies in the world are now at what seem to be bargain prices.

Is the market oversold and ready for a rebound?

Investors, money managers, and CEOs are all wrestling with this same dilemma right now.

But are they really bargains?

Will the economy and the markets rebound quickly once the CCP virus pandemic has washed over us and is gone?

It’s impossible to know at this point, but there are no compelling reasons to be overly optimistic.

Looking Backward or Forward?

One of the dangers among many in this crisis is assuming that it will work out in a similar fashion to the prior one in 2008.

At that time, after several rounds of stimulus from the Federal Reserve, the markets rebounded in 2009. For the next decade, we enjoyed a very active and profitable bull market.

Yes, President Donald Trump and Congress will most likely pass a more than $2 trillion relief package that will not only bail out companies and the stock and bond markets, but will also pay Americans a monthly income for some duration.

But thinking that the stock market will quickly bounce back the way it did in 2009 is not realistic. At least not in the near term. The scale of this crisis is even larger than the one in 2008, if that can be believed.

Thinking that financial history will repeat itself is an easy mistake. Military thinkers call that “fighting the last war,” where your vision is impaired by experience rather than expanded by it. As a result, you’re looking backward instead of forward, leaving you unprepared for what’s coming.

Looking backward, however, may be preferable, as the view forward isn’t a pretty one. The pandemic has yet to peak, and won’t for several weeks or months. There’s no reason to think the markets will recover before Americans do.

According to Mohamed El-Erian, chief economic adviser at Allianz, market volatility will remain as the market continues in its downward trend that’s largely fueled by the pandemic.

And the Wall Street Journal agrees. The global sell off will likely not be over until the CCP virus* pandemic is over. That has yet to happen. What’s more, according to a recent UK study, the pandemic could go on at least for the next 12–18 months or even longer.

These aren’t the circumstances that build confidence in our economic fortunes going forward, or even a modicum of certainty. The markets will obviously reflect this reality.

Opportunities Still Exist

But that doesn’t mean that there isn’t an upside in the markets. For traders, volatility can present some terrific trading opportunities to make sizeable profits on large market swings, whether they’re up or down. But those, too, come with elevated risks.

For long-term investors, however, who don’t wish to see their capital depleted in the short term, remaining on the sidelines in cash may be their preferred option. And it’s a smart one as well.

Remaining in cash positions investors for opportunity as well. Cash’s buying power grows as stocks continue to fall in price.

Recession? Depression? Or …?

A recession would be the very best and most optimistic of outcomes. But there will likely be no beginning of relief for the markets until a financial bailout plan has been approved and perhaps funded, and the pandemic begins to rapidly diminish.

But, according to Nobel Laureate and Stanford biophysicist Michael Levitt, that could happen. He thinks that if the United States follows China’s trajectory, that the pandemic in the United States will be short-lived. If he’s right, then the recession outcome may be possible.

On the other hand, experts in the Federal Reserve are predicting up to 30 percent unemployment, or even higher. That would put us in a category worse than the Great Depression.

Given the scale of events that are so far beyond the control of any investor, all anyone can do is be as ready as possible to take advantage of whatever opportunities come next.

*The Epoch Times refers to the novel coronavirus, which causes the disease COVID-19, as the CCP virus because the Chinese Communist Party’s coverup and mismanagement allowed the virus to spread throughout China and create a global pandemic.

James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.