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This Downturn Is Different
From the perspective of a money manager, the panic created by the viral outbreak has been different from almost every economic and market challenge that preceded it.
Before the dot-com bubble burst, for instance, anyone paying attention would have noticed that Silicon Valley was swimming in companies that enjoyed outsize valuations but had yet to earn a dollar – and had no pathway toward doing so.
Similarly, in the runup to the financial crisis, many knew something was amiss with the lending practices of some of the nation’s largest mortgage providers and that a wave of defaults was possible.
The crisis created by this health issue, on the other hand, was far more sudden and unpredictable. Going back a few months, very few could have forecast more than 50,000 American deaths, entire industries shutting down and millions of lost jobs.
It’s fair to say that nearly everyone would like life to return to normal.
The problem is that not even health and medical professionals know for sure when that can happen.
Meantime, anyone investing during this era of illness-induced volatility must find ways to reduce their panic levels and try to arrive at a calm, clearheaded decision-making process.
In economic terms, the chances are that the viral outbreak will not create a permanent reduction in aggregate demand, and it’s even possible that the most adverse effects will subside within the year, if not before.
China, which accounts for 17% of world gross domestic product and 32% of global growth, experienced its first-ever quarterly contraction, as its economy slowed by nearly 7% from January through March. That’s the bad news. The good news is that as dire as that sounds, the slowdown was less severe than many analysts expected.
Still, it seems inevitable that global economies will experience pain over the next few months, including the United States. But since the economic impact is mostly due to our reaction to the outbreak, the evolving policy response should help to mitigate long-term health and financial problems.
Some states, in fact, look like they may be on the brink of reopening. With better testing, tracing and containment capabilities, the hope is that many more will follow in the weeks to come.
Stocks to Watch
While plenty of sectors with significant long-term growth potential have suffered from the broad market sell-off, that has created opportunities to snatch up some bargains while they trade at discounted rates.
Northrop Grumman Corp. (ticker: NOC). The federal government recently allocated $738 billion for the Pentagon, reflecting the White House’s continued commitment to defense spending.
Northrop will be a big beneficiary, thanks to its B-21 Raider, a stealth bomber that is currently in development. The Air Force intends to spend more than $10 billion over the next five years on procuring these planes, according to reports.
Amazon.com (AMZN). Most people fail to realize that U.S. e-commerce activity is still in the early stages, representing only 11% of total retail sales. That gives Amazon plenty of room to grow, which is underscored by the fact that it is on a hiring binge.
Meanwhile, cloud services are vital for many businesses, especially now that so many have shifted to a telecommuting model. Amazon Web Services’ worldwide share of that market is more than 30% with the unit enjoying enormous margins.
Visa (V) and Mastercard (MA). Visa and Mastercard, combined, process trillions in transactions worldwide each year, thanks mostly to controlling roughly 90% of the worldwide credit and debit market (American Express lags far behind).
These firms are well-positioned now but could become even more so were e-commerce activity to ramp up even more – which is very likely as a growing number of consumers could opt to buy nearly all their goods and services online after having been forced to do so during the ongoing crisis.
Healthy Future
Although the headlines of the past month make it hard to believe, recent volatility will likely dissipate much faster than the doomsday reports have forecast.
Yes, the global fight against the outbreak will be a prolonged process, and there will be more tense moments, but in the long run the fundamental strength of the U.S. economy will hold up.
That gives investors a relatively brief window to put their money to work and capture strong growth potential.
