Articles, Blog

Economic Impact of Coronavirus Epidemic – Barber Financial Group

February 29, 2020


DEAN: I’m Dean Barber, founder and CEO, of Barber Financial Group welcome to the monthly economic update. You need to
understand what’s going on with coronavirus. You need to understand how
it’s impacting the markets. There are strange things happening in the bond
market today. The yield curves inverted all the way up to the one-year. The two-year is not quite there yet. I’m going to take some time adn I’m gonna have Jason Newcomer, one
of our Certified Financial Planners joining me today. You’re not gonna want
to miss this update. You’re also gonna want to share it with your friends. Enjoy! DEAN: Alright Jason, let’s do the let’s do the
thing here. So we think about what’s going on with the coronavirus and
obviously it is on every single news channel. You can’t turn on any news
channel without having people talking about the coronavirus. People are
freaking out, they’re scared to death the market seems like it’s in a freefall. We
want to put this in perspective for people and so you created a chart that I
think is worthy of going through. So watch us walk us through this chart. What was on your mind when you put this together? JASON: Yeah so obviously when a headline is driving so many emotions in the news and driving markets– we don’t
know what’s gonna happen in the future. We don’t know how bad coronavirus is and
I don’t pretend to be an expert in microbiology or pathology, but what we
can do is look at the past and what are some headlines are examples of typically
negative news events that have happened and how have they driven markets.
So that’s what I put together here. I looked back to 2008 and kind of
dug through old newspapers, old headlines and websites and found a lot of things that
if they happened you would generally expect there to be some sort of a
negative impact to the stock market. –DEAN: Okay at least in the immediate. –DEAN: Alright, so
let’s go through some of these. –JASON: Sure you were starting out here this is back in
January of 2008. So obviously what was going on here was the Great Recession. That was the routing of the market all kinds of default bank bailouts.
Automobile, manufacturing, bailouts but you got the h1n1 swine flu outbreak.
JASON: Right. and thats not to draw a comparison
between the corona
virus and the h1n1 swine flu outbreak. Those are two totally different things.
However when that was going on back in the summer of 2009.
Everyone was just gripped by how bad is this swine flu outbreak going to be? DEAN: Right especially after we just got finished with the Great Recession
JASON: Right. DEAN: It did move the markets Alright now, you got the US debt
being downgraded. You got let’s see you got the Ebola virus outbreak
JASON: Yeah DEAN: Okay, now that that drop right there doesn’t look as significant as today
as what we’re seeing today but I think it’s just on a different scale because I
think the to pull back there was somewhere in the 12% to 12.4% range
on the Ebola virus. So it was a correction, move the markets
lowers, and there was fear, right? People really didn’t know well what is this?
how are we gonna be able to cure it? is it gonna become a pandemic? And of course
that’s the exact same thing that we’re hearing out of the corona virus, right? JASON: Right, and it’s not to make light of any of these you know viral outbreaks.
Obviously, the loss of life is tragic but we’re looking at things today just from
more of an economic viewpoint. What was the impact that these viral
outbreaks had on markets around the world and historically they have had
maybe a quick downturn in the market, but really no long-lasting impact. DEAN: Right. Right. Alright, so let’s move on here. You have
let’s see, another US Treasury yield inverting. Now that
inverted not quite to the two-year to the ten-year.
JASON: right DEAN: So that inversion simply means
that that the 10-year yield goes below what the
2-year yield is. Well, now the tenure was below what the one-year was right
right but it never did quite hit below the 2-year boost. I mean almost. it was pretty darn close, right?
JASON: Right I think that it’s important for us to
realize that there’s always going to be something that’s going on.
That’s knocking them off-kilter. Markets are an emotional being, right?
because it’s people trading and saying, “oh I got to do
this. I got to do that.” JASON: yeah
DEAN: That’s really not the right way we should look at this is it? JASON: No. No. I think, you know,
if you’re working with an advisor someone who’s managing your investments. chances are good that
you’ve gone through some sort of a risk tolerance exercise in the past.
And you went through that exercise with your advisor. You selected a portfolio that
was in line with your goals and your financial plan and your risk tolerance.
if you’re opening up your February statements and you are surprised or
shocked that compared to what the market did you know, looking at your portfolio
returns– it’s probably a good opportunity while we’re still within earshot of
all-time highs, right? We’re only down today– DEAN: 7.5% percent maybe it
was 8% JASON: 8% for the all-time highs.
Not a bad opportunity to revisit that risk
tolerance discussion with your advisor and talk about should you be making any
changes, DEAN: And of course when we’re doing the financial plans one of the things
that we’re looking at is how much risk do you need to have in your portfolio in
order to accomplish your goals? Or said another way, “What’s the least amount of
risk that we can actually take and still have you be able to accomplish all your
goals?” So if emotions were running high and
you’re just thinking gosh I’m nervous I don’t want to see a big drop.
Get with the advisor and say alright what’s the least amount of risk
we can take and still accomplish our long-term objectives? And really if you
can look at your financial plan you can say you know what I was at a 95%
probability of success two weeks ago and I’m still at a 95% probability of success–
that means you don’t have to worry. It means you don’t have to think
oh my gosh this is chaning my life. Yes, the portfolio goes down but as you can see from the chart. It normally is a temporary thing. Its always been a
temporary thing. Sometimes the temporary period is a little bit longer.
Alright, let’s go to the yield curve. Go through this chart with us real quick
Jason. JASON: Sure. So went back to 1978 and what we were looking at is the spread between
the 2-year Treasury and the 10-year Treasury on top DEAN: So the difference
between the two lines, the two crazy purple lines here, that’s spread on the tenure dress . JASON: The top chart there is the ten year –
minus the two year and there’s a line that goes right across all this. We have to
come so that’s that is zero so anytime that purple line goes below that axis
that means that we’ve had a yield curve inversion and what you’ve seen going
back to the 70s is that typically when you have that yield curve inversion a
recession follows. Its pretty clear to look at that.
DEAN: So here we almost touched it? JASON: Yeah we did touch it but just barely and I think it
only lasted a day or two DEAN: Yeah it may have even just been an intraday thing, but we did have the 10-year Treasury hit an all-time low. It actually hit 1.3% yeah. I think that was on Wednesday. I mean we don’t
see yields that low ever. And at the same time the 30-year Treasury hit
an all-time low at about 1.7 something. So extremely low rates.
JASON: Yeah, mortgage brokers are gonna be busy. DEAN: Right, so here’s something
that’s interesting we don’t have a headline on this but if you look for you
can find it. With all the bad news that’s out there there was actually an article
that came out on CNBC on Wednesday that said that housing starts hit a 12-year
high in January. So that would normally be something
that would tell us that the economy is on solid footing people are buying, their
building, and it’s a good sign right? But the coronavirus is really
overshadowing a lot of what I consider to be some other good things that are
happening in the economy. –JASON: Sure yeah and the economy and the stock market are two
separate things that are kind of tethered together, generally. But there’s
a there’s a good analogy that I’ve heard where you’d imagine a man walking his
dog through a park and they’re connected with a leash and the dog might get
distracted by a squirrel and run to the right and then get distracted by another
dog and run back to the left. The man though, he continues walking in a
straight line at a steady pace and they’ll wind up at the same place at the
end, but this dog is kind of a representation for the stock market.
It’s erratic. it’s moving all over the place for no apparent reason. But the
man is the economy. –DEAN: yeah I get it. That’s a really good analogy.
I can see it. I just hope the dogs not too big so its not pullint the economy
all over the place. Sometimes you do see that happen, though
I think that’s what we’re seeing here. with that 10 in that and that 30-year
Treasury hitting those all-time lows is maybe some false signals of or some
uncertainty about what’s gonna happen with the economy because of the
coronavirus it’s really pulling down those financial instruments on the
10-year 30-year Treasury. JASON: Sure, yeah. DEAN: So you did another chart here, Jason, and
that was looking at what happens to the markets after a yield curve inversion
trend, right? Take me through this slowly. JASON: Sure so there’s a lot of different
numbers on here I think the big takeaway is generally when there is a yield curve
inversion it signals that there’s rough times ahead. Whether it’s the stock
market or the economy that you’re going to have some turbulence. It is not a good
timing mechanism, however. So what we’re looking at here is again going back to
the 70s every time the yield curve between the
ten-year and the two-year inverted. And then where was the S&P 500 the day of the inversion. What about six months after, 12 months, or 24 months on 3
years and then five years. DEAN: This one in 78 didn’t do much?
JASON: Yeah no. DEAN: I think that
was a deal where the economy had just come out of that really slow period
there with the energy crisis in the early 70s but
here’s one I think’s really interesting. right so you get the yield curve
inversion on 5/26 of 1998. Because 98′, that was just prior to the dot-com
bubble. Okay well you six months later, eight and a half, twelve months
later you’re 19.3% and then you’re 26% 24 months later but if you come
on out here 60 months later, now you’re minus 14 right, right? So
that yield curve inversion doesn’t mean it’s an immediate recession, but it
does signal and has in the past that that’s something that could be coming
down the road. There’s just nobody putting it on the calendar saying this
is when its going to start. –JASON: Right, this is not something that you’d want to look at
and say based on when the yield inverted I need to move my stocks and
bonds or make an overhaul to my portfolio. Because it’s not a good timing indicator.
DEAN: Right it could mean that maybe over the period of the next six to eight
or twelve months you want to be able to maybe a little less
aggressive or maybe you reduce the equity exposure a little bit. JASON: If nothing else it’s just another good opportunity and a reminder to look at your portfolio,
the level of risk that you’re taking, and what your exposure is should things get
bad. DEAN: And everyone should really be looking at that on a regular basis.
JASON: Absolutely. DEAN: Alright. So let’s go to the coronavirus here, and I’m gonna put a
link to this particular website because I want everybody to really understand
what’s going on here. There’s two numbers that we see here that are plastered all
over the news and you got to dig deep in written articles to actually find the
third number that we’re gonna discuss here.The first number is the 82,550 that’s the total number of confirmed cases as of the day
that we’re recording this and of course we know by the time everybody’s watching
this there’s gonna be more. Now 2,810 deaths so those are the things that you’re seeing. What you don’t see is the thirty three
thousand two hundred and fifty two recoveries, right. So those people are no
longer infected, so I think, a better way for us to look at this from a logical
standpoint not from a sensationalism or you know let’s scare the heck out of
everybody. What are the number of active cases? How many people today are
contagious? The people that can actually pass the disease to
another person and what you see here on this chart down below, and again we’ll
put the link out there so that you can go look at this yourself, but what we’re
seeing is that the total number of confirmed cases– the path of growth has
slowed dramatically. I mean if we were still continuing up like this, I mean
we’d see this chart way way way up here. So this has slowed its
rate of increase but the number of cases here where people have recovered has
increased substantially. So really what we saw from about February 17th
through the date of this recording, we saw almost a 20% decline in
the active cases. So I wish that we could get some
headlines out there that we’re talking about that we act we were actually
seeing a decline in the active cases because we are having, you know, a great
big number of these people that are recovering. So have you read that
anywhere? Have you seen?… JASON: No. It’s all about the total confirmed cases and how
many people have died from the virus. DEAN: Right and so then you get this
hysteria of well I’m not gonna travel. I’m not gonna go to the grocery store.
I’m not going to the gym, you know? We’re canceling our vacations and I get it.
We’ve got to contain this thing’s. We don’t know really what’s gonna happen so
I think that, looking at these charts though and looking at
reality that the containment has been good, right? You can go through this chart
and you can click on any one of these mainland China and you can see
here’s my confirmed cases. Here’s my deaths. Well, that’s where most of the deaths
have occurred 2,744 of them, but look 32,879 people in mainland China have recovered. Now what I think would be
even more fascinating to understand is of the people who have passed away, did
they have some sort of other problem? Other respiratory problems? Where
they old? Or maybe they, you know, had some sort of a heart condition or something
like that? I don’t know that there’s that much data
out there on that right now but and the other thing that I haven’t seen is
what’s the actual time from when you get coronavirus to when you recover. I
haven’t seen any data on that. I’ve got to imagine though with over 33,000
people having gotten the virus and recovered there’s got to be something
coming out on that on the averages. So when I look at this, yes, I’m still
nervous about it. Yes, it still is worrisome, but I think that we’re seeing
things trend in the right direction with the number of active cases dropping. So
dramatically here over the course of the last just last ten days. Any other
thoughts you want to share? JASON: Just, as always be aware of what’s going on in
the news whether it’s the coronavirus or an election coming up.
Be aware of what’s going on but don’t let your emotions override the decisions
that you need to make from a sound financial standpoint.
DEAN: Alright good stuff Jason thanks for being with me. Alright, thanks for all you. YouTube viewers out there. Please like this and subscribe and
hit the little bell icon and that way every time we put out one of these
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