What the Coronavirus Could Mean for the Economy
The world has been rattled by the coronavirus outbreak. Markets are extremely volatile, the Fed has slashed rates, stores have run out of toilet paper, and many cities have been ordered to “shelter in place.”
There is a lot of fear and uncertainty around the virus and how it will impact our lives—in both the short- and long-term. Read on for a deep dive of how some macro forces are reacting.
How the Coronavirus Is Affecting the Economy
There’s no doubt that the coronavirus is impacting the economy worldwide. The Organization for Economic Cooperation and Development warns that the coronavirus could lead to slower growth for the global economy. The world economy is now expected to grow by about 1.5% in 2020. This means the economy is still growing, but not as quickly as economists had previously predicted. If the economy slows down for at least two fiscal periods (about six months total), some countries could be in store for a recession.
The coronavirus may seem like a health issue, not an economic issue. But health affects different industries in various ways. For example, the travel industry is struggling because people are canceling flights or putting off scheduling trips they would have otherwise booked. Travelers don’t want to travel to countries with higher infection rates or be in close quarters with strangers who could be sick. The industry earns $5.7 trillion per year , so if it continues to suffer, there’s a lot of money to lose. Depending on how badly the industry hurts, people who work at airports, hotels, and tourist-driven restaurants could lose work.
Another example is the technology industry. Companies like Apple and Microsoft have warned investors they won’t be able to meet the financial goals they set for themselves for the upcoming quarter or for 2020 overall. These companies manufacture products in China, and numerous factories have shut down as the virus spreads to prevent people from coming to work and infecting their coworkers. Factories are gradually reopening, but it takes time to get supply back to where it was a few months ago.
When these companies struggle and people sell their shares, stocks often lose value. When a bunch of stocks in various industries drop at the same time, the stock market as a whole can dip significantly.
Is It All Bad News?
Certain companies are doing okay amid the coronavirus concerns, such as ones that sell cleaning products like hand sanitizer.
Other companies doing well in the stock market are ones that provide products people can enjoy from home. Netflix and Zoom Communications’ share prices are holding up, because people may need to hop on a video call as they work from home or be more inclined to binge watch Love Is Blind than to venture out to a crowded area.
How did the Federal Reserve Respond?
Despite these few shining stars in the stock market, the market has still been struggling overall. That’s why the Federal Reserve, aka “the Fed,” decided to take action.
In its second emergency meeting this month, the Fed announced it’s lowering rates all the way down to zero.
The federal funds rate influences interest rates for credit cards, mortgages, personal loans, high interest savings accounts, and more. Lower rates typically result in more people borrowing money, which can boost the economy. As the coronavirus spreads and the stock market drops, the Fed decided to take drastic action in an attempt to help the economy.
The stock market has gone through a lot in the past few days. Last week it saw the biggest drop in a single week since the global financial crisis struck in 2008. Then on Monday, the market saw its biggest point gain in recent history.
Although Wall Street was anticipating a rate cut later this month , the impromptu decision caused some to speculate the outbreak’s impact on global economic growth could be worse than expected.
Advice from a SoFi Financial Planner
Whenever people start to panic at the news that stock market indexes are dropping, they should repeat three words to themselves: “Volatility is normal.” Like most parts of life, the stock market has its good times and its bad times. Bad weeks are part of the process.
“Over the last 70 years, a 10% decline happens in the S&P on average once a year,” explains Brian Walsh, CFP® at SoFi. “Despite that, stock investing has still been the source of greatest growth during that time period.”
This isn’t the first time the stock market has gone through a major crisis, and it won’t be the last. And that’s normal.
Still, when people check their investments in the stock market and see how much they’ve lost in just a couple weeks, they may freak out. That’s why investing in the stock market is a long-term game.
“Short-term money should be liquid and safe,” Walsh says. “Long-term money is focused on growth and the risk you are comfortable with. So the only money experiencing fluctuations should be long-term money and we care about balances decades from now not days from now.”
Investors should also consider how risky they want their investment strategy to be. Do they want to remain conservative so their assets don’t fluctuate too much in a short period of time, or take risks so they have the potential to earn money aggressively? The less risk they take, the less impact an epidemic like the coronavirus will have on their portfolio.
The amount of risk a person is willing to take on depends entirely on their personal goals and individual situation. People who aren’t sure how much risk they’re taking (or even how much they want to take) should consider talking to a financial professional about their plans.
The coronavirus panic is a perfect example of a time people should remain unemotional in their investing strategies. If they allow themselves to be freaked out by news headlines and sell all their stocks, they could lose money in the long run.
“Remember that most sources of news are incentivized by views or clicks,” Walsh says. “The source of ‘breaking news’ may be different, but headlines are generated to capture attention. Rather than reacting to headlines, keep things in perspective for the long run.” Whether it’s the coronavirus, a trade war, or political strife, people shouldn’t let headlines dictate their investment decisions.
Keeping an Investment Strategy
This has been a week of significant market volatility and uncertainty surrounding the global economy. Volatility is normal. Despite that, stock investing has still been a source of great growth during that time period.
Unfortunately, we’re in one of those volatile periods right now amidst the market declines this week and the fear of the coronavirus spreading.
During periods of uncertainty like this, it becomes even more important to focus on your goals and not get distracted by short-term losses. Getting your money right as an investor means staying the course and having the assurance that—in the long run—markets tend to increase. We believe that diversifying your portfolio and making regular investments–even during a downturn—is one of the best things many investors can do to secure financial independence and prosperity.
We have created a few products that can take your mind off of investing and work towards securing long-term growth. Set regular contributions to stocks you choose or regular contributions to an automated investing advisor which makes the choice for you. We also have a safe haven collection which features investments that seek to limit losses during a downturn. All these products have no trading fees and you’re able to get started with as little as $1.
Safe Haven investments are expected (but not guaranteed) to retain or increase in value during times of market volatility and turbulence. Check them out in the SoFi app today.
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