THE RISK MANAGER: 2020 Economics Edition
THE ECONOMICS OF OPPORTUNITY
From February 19, 2020 to March 12, 2020, the global stock market entered bear territory in record time, and market traders have since continued to experience extreme price volatility, as the COVID-19 virus works its way around the world and through our communities. The public flow of information has been: updated virus data gets released, the mainstream media reports it, the markets react, and the financial media report those reactions. This chaotic pattern is fed primarily by uncertainty. Press conferences by government leaders and monetary actions by central banks have not calmed markets (no matter who is speaking or in a position of authority), because the impact this virus represents to our health and to our global economy, is unclear.
TRADING VS. INVESTING
Adding confusion, much gets reported across media channels about what “investors” can expect. In my 20-year career, I have yet to meet a true (i.e., long-term) investor with a time horizon of 1 quarter - the length of expected market impact of COVID-19. Trading and investing are different: "Trading refers to using the financial markets to do regular transactions, taking risk to attempt short-term profits. Investing refers to using financial markets to match your preferences and risk tolerance with a strategy to generate consistent long- term results to fund your entire financial strategy. Comparatively speaking, investing is a low-risk method of developing long-term financial independence." (Kolkman, 2014).
THE OPPORTUNITY
For true investors, the opportunity for gain has not been this substantial for over 11 years. In average terms (at least in the U.S.), this bear market may last around 14 months, and not recur for another 4.5 years once the discount on stock prices has ended. Recession or not, bear markets are brief, and bull-markets are long – worldwide. True investors ignore the noise around them, and choose instead to see the opportunity for gain. To the trader, “how much” and “when” are important. Investors, by contrast, have 2 primary concerns: 1) maintaining current holdings, and 2) not attempting to answer “how much” and “when” in an effort to find a bottom, instead looking for a general change in direction to deploy new capital. Indeed, true investors know their only risk of loss is selling holdings that are temporarily depreciated (Murray, 2013).
RECESSION OR NOT?
Will we have a global recession? Probably, but not certainly. In the U.S., recession has followed more than 70% of the bear markets that have occurred since 1946 (LPL Research, as of March 10, 2020). Statistics are similar for other countries. What is certain: our global economy will be impacted by this virus, though we cannot know the extent. As of this writing, the International Monetary Fund (IMF) has not yet revised its expected 2020 growth rate of 3.3% for the global economy.
GROWTH AHEAD
Finally, the global economy has suffered many substantial setbacks since we began recording economic output in 1270. For 2019, output (GDP) reached $86.6 trillion (the U.S. accounts for about 1/4 of this output), and was expected to rise to near $90 trillion in 2020. Whether the world economy reaches $90 trillion or remains flat at $86.6 trillion in 2020 (or lands somewhere in between), global GDP is expected to clear $100 trillion around 2022. While every quarter and every year counts, the investor knows that this quarter and this year will be data points consolidated into a consistent, long-term growth pattern, and will therefore look patiently towards the economic recovery around the corner.
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References
LPL Research. (January 7, 2019). Bear Market Without a Recession. Retrieved from:
https://www.lpl.com/news-media/research-insights/bear-market-without-recession-podcast.html
Amadeo, Kimberly. Reviewed by Berry-Johnson, Janet. (March 16, 2020). US Inflation Rate by Year from 1929 to 2022. Retrieved from:
https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093
CBS News. What's a bear market, and how long might it last? Retrieved from:
https://www.cbsnews.com/news/whats-a-bear-market-and-how-long-might-it-last/
Roser, Max. (2020). Economic Growth. Published online at OurWorldInData.org. Retrieved from:
https://ourworldindata.org/economic-growth
Plecher, H. (Dec 9, 2019). Global gross domestic product (GDP) 2024. Retrieved from:
https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/
Kolkman, Aaron. (2014). The Life Cycle of Wealth: Four Phases of Your Financial Life. Tate Publishing.
Murray, Nick. (2013). Simple Wealth, Inevitable Wealth. Nick Murray Company.