This article was updated March 19, 2020.
Over the past few days, events have continued to unfold swiftly — and markets continue to be volatile — as policymakers make an all-out effort to react to the coronavirus and navigate a weakening economy.
The markets have been reacting poorly to the pandemic this week. Yesterday, a “circuit breaker” was triggered when the S&P 500 — an index of companies that is looked at as a mirror of the markets as a whole — fell 7% from its previous close. When that happens, an automatic 15-minute halt kicks in. A circuit break halted trading last Monday as well, and two halts also happened last week.
Trading halts give investors a little time to think before selling in panic, and they also give market operators time to make sure there aren’t any technical issues or interference. Another 15-minute halt would have been triggered if the S&P 500 had dropped by 13%, and a final one if it had dropped by 20%. If the third circuit breaker had been triggered, trading will have halted for the day.
America’s response to the coronavirus continues to escalate this week. Tuesday, the Trump Administration proposed a $1 trillion stimulus package that includes sending checks directly to Americans as well as assistance to the airlines and small businesses. France and other countries have also pledged tens of billions of euros in immediate aid for businesses and employees. Last Sunday, the Federal Reserve (aka “The Fed”) announced it was also taking emergency measures to add money directly into the economy, including cutting interest rates to 0%.
What’s being done to help?
Last Friday, President Trump declared a national emergency over the coronavirus pandemic, which opens up access to $50 billion in financial assistance for states and cities. It frees up funds from a $40 billion account to use toward the crisis, allows the Federal Emergency Management Agency (aka FEMA) to coordinate the response, and empowers the president to direct federal aid and response to the states. If passed, the stimulus package could give direct financial aid to all Americans as well as a payroll tax cut and relief to the travel and tourism industries.
The administration also passed the bipartisan Families First Coronavirus Response Act to provide testing and financial help, and President Trump signed it into law yesterday. It guarantees 14 days of paid leave for sick people or people who must leave their job to care for sick family members or kids whose schools have closed, at “not less” than two-thirds their regular salary. It also makes food programs for children, seniors, and the disabled easier to access, and makes coronavirus testing free.
The US military is opening its labs, distributing key medical equipment, and readying its hospital ships. Each ship has a 1,000-patient capacity to relieve pressures on civilian hospitals. The Pentagon is also providing five million respirator masks to safeguard front-line responders.
The IRS has extended the deadline to pay additional income tax to July 15. Taxpayers are still expected to file by April 15. California residents have until June 15 to file and pay state taxes.
New York State has suspended eviction proceedings and pending eviction notices indefinitely. A coalition of landlords has voluntarily halted evictions for 90 days unless for criminal or negligent behavior. The state also suspended mortgage payments for 90 days.
Carriers have suspended data caps, increased internet speeds, and are creating more affordable options for limited income households.
Uber Eats has waived delivery fees for more than 100,000 independent restaurants.
What does the Fed’s cut mean?
The Fed cut interest rates to 0% and launched a plan to buy $700 billion in US Treasury bonds and mortgage-backed securities. This buying program is called quantitative easing, and it’s intended to add money directly into the economy. This came after last week’s announcement of a $1.5 trillion injection of capital into money markets to ease financial stresses.
Interest rates affect the cost of borrowing and savings rates. When interest rates are cut, the cost of borrowing goes down — mortgages, credit card borrowing, and auto loans become less expensive. The benefits of savings go down, because the interest earned on savings accounts and certificates of deposit (CDs) is also lower.
The purpose behind making interest rates this low is to incentivize banks to lend more money, because it costs them more to hold on to cash. Low interest rates also help to boost inflation and weaken a country’s currency by making it less attractive compared to other currencies (this makes the country’s exports cheaper). All of these things are meant to help reinvigorate economic growth. The US is not alone: There are currently a number of countries that already have near-zero or negative interest rates, including most of Europe and Japan.
What is the market responding to, with all these moves?
In a word, uncertainty. A lot happened has happened very quickly. To name just a few things: Public schools and restaurants were ordered closed or limited. The US and Canada closed their border to “nonessential traffic.” Residents of some localities have been ordered to “shelter in place” and not work at all, unless their job is on a list of “essential business” or they can work from home. Support packages can help bolster the economy but don’t eradicate a virus — and so the uncertainty continues.
Are we headed for a recession?
Is a recession on the horizon? The short answer is that, for all intents and purposes, we are very likely in one. The technical definition of a recession is two consecutive quarters of economic decline. But we don’t have to wait that long to see that economic activity is rapidly slowing.
Within the space of one week, the impact of the coronavirus snowballed from a looming concern to a reality of life. Quarantines, travel bans, school and business closures, and canceled events: All of these things show us there will be an economic decline, possibly a steep one, here and across the globe. Recessions typically start with a shock.
Most economists believe recessions are an inevitable part of normal business cycles. The US has been through 11 recessions since the end of World War II; each time, the market fully recovered from those recessions to reach new highs. We’ve had our longest run ever without one this past 11 years.
What’s unknown about this recession is how long it will last and how bad it will be — and that fear of the unknown is what’s driving market volatility. The Great Recession of 2007–2009 lasted 18 months, while the 1980 recession lasted only six.
As to how bad, we’ll have to wait and see the effects on the economy and unemployment. The worst recessions usually involve a financial collapse like the global financial crisis of 2007. This time — partly due to the lessons learned then — our financial system is less vulnerable and our banks have stronger balance sheets.
What does that mean for me and my money?
While this pandemic was not predictable, there is one thing we can predict: Uncertainty itself. At Ellevest, we plan around realistic market scenarios — such as the possibility that any given year might be like 2020. We also put your money in different types of investments that move differently from one another, so that all your eggs aren’t in one basket financially. Although the stock markets may be down, your investment portfolio is not just stocks. We diversify all of our portfolios across many different asset classes to help protect against the things we don’t know and can’t foresee.
And finally, we manage your investment portfolio over time to get more conservative as you get closer to needing your money. All of this means that your portfolio is built to help you achieve your money goals — even when times get stormy.
You can take your money out of your investments right now — but what can hurt the most when it comes to investing is missing up days in the markets while trying to avoid bad days. Investing over time — sunny months like January 2020 and stormy months like March 2020 — means that sometimes you’ll be buying when prices are low and sometimes when prices are high, and you’ll pay an average price over time. For the long term, we believe it’s generally best to stay in the market.
One example: If you had invested in the stock market from 1999 to 2018, and not touched it, your money would have tripled. But if you had traded in and out and had missed out on just the ten best stock market days over that period — just ten days — your returns would have only been half of that.
Meanwhile, it’s definitely stressful to watch all of this going on around us and not do anything. Self-care of all types — financial, physical, emotional, spiritual — has never been so important. Our lead financial planner, Rachel Sanborn Lawrence, put together a toolkit for managing your financial health during the coronavirus with actions you can take right now (especially if you have some extra time at home). Our lead career coach, Stephenie Girard, is sharing her best tips on how to work from home efficiently. And we’re on Instagram to answer more questions as they come up.