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The Pandemic’s Impact on US Economy & Investment Management Industry

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Last Updated on June 26, 2020
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The Coronavirus pandemic has sent shockwaves through the global economy, causing disruption not seen in decades. COVID-19 has taken the world into a state of emergency. The economy is losing its balance and countless once-solid entrepreneurs and companies are sent into a tailspin. As the stock market exhibiting a downward trend there is an urgent need for consulting among the many alarmed investors. 

The blog aims to examine the economic situation in the US, the dynamic changes in the sentiments of the public on an economic rebound. The perspective of the analysis is highlighted in two broader aspects in terms of how the investors react to the pandemic and what are the new opportunities the investors can engross to cruise safely through this downturn.

The pandemic has dealt a massive blow to consumer spending, GDP, and uncertainty about medical and economic issues which will hold back investment. 

  • The baseline forecast done by Deloitte shows GDP falling over 17% in the first two quarters of 2020. 
  • More than 33 million Americans have lost their jobs in the last two months with more than 27 million Americans have applied for unemployment benefits and the Small Business Administration, which supports U.S. entrepreneurs with loans and funding, has run out of money for its Paycheck Protection Program.

Financial markets reacted to the pandemic by plummeting, reducing the liquidity of many asset classes, postponed M&A transactions, temporary closure of small financial markets, and increasing credit spreads that added to the misery of the investors.

Demand for oil dried up as the lockdown had kept people inside. As a result, oil firms have resorted to renting tankers to store the surplus supply and that has forced the price of US oil into negative territory. 

It all leads to a strong likelihood of a slow recovery, which largely depends on overcoming the virus and reopening the economy.

Retail Investment makes up 20% of U.S GDP, with zero economic activity, people confined to home, hovering uncertainty about medical and economic issues made retail investors skeptical on the prospect for a “V” shaped recovery, in fact only 9% Investors anticipate it and are positive on the rebound to the pre-crisis economic level and growth rate. Most investors expect COVID-19 to severely impact the US economy through Q4 while many expect a return to S&P 500 earnings growth in Q2 2021. The Sharp rise in unemployment and disruptions to supply chains have got concerns over the public with 50% worried about their financial situation, a 23% increase from the previous year. Negative sentiment on economic rebound showed that the worsening of disposable income directly impacts retail investments.  

Events like Coronavirus provide an opportunity to learn about investor psychology and human behaviour. The sentiments on economic rebound being highly negative, investors were driven into a panic mode, crushing the markets. S&P 500 triggered market-wide circuit breakers halting the trading 4 times in March, this has pushed the Fed to announce more emergency loans to money market mutual funds as Investors alarm persists. This landmark crash calls us to study the assets held by investors pre COVID, without much surprise the assets have largely been Equity Funds, Mutual funds, and high yield bonds. They looked for Quasi -risk to risky assets. 

  • The SIFMA survey results showed that 93% indicate retirement planning as the reason for saving/investing with 66% of them being Baby Boomers and Gen X. 
  • 44% of households owned at least one U.S. mutual fund. 

Source: SIFMA Insights Research Reports

Investment Managers, Advisors, and Firms began to panic leading to significant pressure on fund liquidity as investors looked for new opportunities to redeem or reallocate holdings. Investment managers had to take significant protective measures like repositioning investment portfolios, reassuring investors that they are managing through the volatility professionally in tighter time cycles.

Taking positive cues from the market rebound post the tech bubble, SARS, the GFC crisis, holding position has provided better returns, this guided advisors to shelter their clients’ investments i.e. to ‘stay the course’ and don’t lock in or sell-out’ for the next 6 – 12 months. While some have maintained enough cash in hand, to buy low and sell high, the focus was more on blending asset allocations with non-correlated assets like gold can reduce risk and boost overall returns in a bear market. The uncertainty and fear caused by the pandemic make safer assets Treasury Bonds & gold more attractive for investors.

Holding gold is usually a good portfolio diversifier, especially during times of crisis. Anxious investors turned towards investing in gold over medium and long-term owing to panic in the market. Following the 2008 GFC pattern, during COVID demand for Gold had spiked considerably with a record-breaking Gold Buying Binge seen during the First Quarter of 2020.

  • $23 billion of exchange-traded funds that hold the metal, according to a recent report from the World Gold Council.
  • The SPDR Gold Shares are up 8.6% in the year while the S&P 500 index is down 17.7%.
  • Gold prices reached a record high above $1,900 an ounce and were recently trading around $1,650, with record-breaking Inflow of Cash to Gold ETFs with 132.5 tonnes moving in between Feb. 28 and March 27, total holdings stood at 3,165.5 tonnes, the highest amount ever.
  • Gold is now seen as safe as Treasury Notes which are backed by the Government.

Risk-free interest rates, like those on Treasury bonds, have been driven down to record lows, reflecting investors’ desire to hold assets of an entity that they know won’t default. Treasury bonds provide better returns over the long run. 

  • Considering volatile situations, high-yield corporate bonds experience a steep decline in revenues.
  • 10-year treasury yield rose 4 basis points to 0.64%. The interest rate on 10-year Treasury notes is projected to rise gradually, reaching 3.1 percent in 2030. Also, the 30-year Treasury bond was higher at 1.24%.

Post-COVID Forecast of T Bills:

Source: Deloitte-United States Economic Forecast

  • US economy to begin a strong recovery, not before the middle of 2021. From 2021 to 2030, the output is projected to grow at an average annual rate of 1.7 percent.
  • A stagnancy in retail investments until 2021 with a decrease in disposable personal income in US households by 90 basis points.
  • Amid COVID-19 crisis, the investors expect honest, transparent communications and forthcoming information about what they cannot forecast with any accuracy.
  • Investors harboring safe assets with Treasury bonds set to rally over the next two quarters. Investment in Gold set to increase, trends follow Post 2008 GFC crisis making Gold Safe-haven metal due to COVID-19.

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