From: James Thorson, Chairman of the SCSU Department of Economics:
How likely is a recession as a result of the coronavirus pandemic and the closure of many businesses?
If the social distancing measures remain in place for a month or more, then a recession is almost inevitable. Even in our increasingly online economy, many of our transactions involve face-to-face transactions. In many sectors of the economy, spending is being curtailed — which results in lower incomes. The good news is that if the virus gets under control fairly quickly, any downturn should be relatively short.
Will the economic stimulus help stave off a worse recession and help it bounce back more robustly when the virus is finally under control?
In all likelihood, economic stimulus should lessen the severity of a recession — as long as the stimulus induces additional spending in the economy. This additional spending is likely because many people have had their incomes reduced dramatically, so they will need the stimulus money to survive. Once the virus is under control, the economy should bounce back pretty quickly because there will be much pent up demand.
What are your thoughts on the volatility of the stock market?
The stock market hates uncertainty and this virus has caused uncertainty. What we thought was going to be a two week or so social distancing period has extended to an uncertain period of time. This is having devastating effects on businesses such as restaurants, hotels, airlines, among others. When this will end is anybody’s guess. Such uncertainty always makes investors nervous. The good news is that the virus will eventually come under control, and the economy and the stock market will eventually recover.
What effect is the pandemic having on small businesses?
Many small businesses are going to be hit very hard by the pandemic, at least in the short term. For example, many restaurants and stores have shut down for the time being. That means that these business owners are still paying rent and property taxes, but they are receiving no income. Even businesses not directly affected are likely to see a slowdown. The supply chain in the United States is still operating, but more slowly and not as completely.
Also, productivity is likely to be lower, even with people working from home. For most of us, our houses are just not set up as efficiently as our workplaces, so that makes it more difficult to get work done.
With the market in decline, is this generally a good time for people to increase their investments, such as in a 401(k), or to sit tight?
The general question of market timing is always a difficult one, and stock prices are inherently unpredictable. For a person with a long-tern horizon, I would not shy away from investing in the market. Those who invested in the market in 2008-2009 still have done very well, even with the market decline.
The best time to invest in the market is when things are at their worst. But there are two potential challenges with that strategy. First, we never really know beforehand when “the worst” is. Second, it can be psychologically difficult for many people to do this. That is one reason why automatic investment strategies, such as when we have money withheld from our paychecks to be put in a 401(k) or 403 (b), can be very successful over time.
