How will the Coronavirus recession impact you, how bad will it get, and how long will it last? We’ll dive into all those answers, but before we get into the grim details, let’s consider the upside.
The coming months may be one of the best times of your life for wealth creation.
That is, if you play it right by conserving your money now, studying how to invest, and getting prepared to buy investments when they drop to new lows.
The Coronavirus Recession
Ladies, gents and people, this post is intended to get you out of fear and into action.
While the Coronavirus is scary, this period in history is also a 1 in a 100 year opportunity.
We haven’t had something this large in scope since the 1918 Flu Pandemic infected an estimated one-third of the global population.
According to History.com, “The Spanish flu pandemic of 1918, the deadliest in history, infected an estimated 500 million people worldwide—about one-third of the planet’s population—and killed an estimated 20 million to 50 million victims, including some 675,000 Americans.”
Like the Coronavirus, it was a highly infectious virus that spread rapidly to all parts of the globe, affecting health and economies worldwide.
While the medical implications and death rates of the Coronavirus are very different, the economic implications are highly relevant—and so are the opportunities.
Remember, with every crisis, there also comes opportunity.
When I first heard about Coronavirus cases emerging in China in late December and early January, I’d hoped we’d experience relatively “run-of-the-mill” economic recession as a result of China’s woes. After all, recessions do happens periodically.
For example, there was the U.S. Housing Bubble of 2008, which led to a recession. That was a real estate bubble in which housing prices peaked in early 2006, started to drop over the next two years (2006 and 2007), and then reached new lows by 2012.
By December 30, 2008, the Case–Shiller home price index, which track the health of the housing market, reported its largest price drop in its history.
The Dot Com Crash caused another memborable recession. Also known as the “Tech Bubble” or the “Internet Bubble”, excessive speculation in Internet companies in the late 1990s later induced a severe stock market crash.
There have also been other recessionary periods when defined by strict economic terms. This is because economists like to define recessions mathematically.
Economists mark a period as a recession when the total value of goods and services produced in the U.S. (the Gross Domestic Product or GDP) falls for two or more quarters in a row.
However, I prefer a functional definition of a recession, because it speaks to implications in our day-to-day lives.
I define a recession as a period of economic pessimism accompanied by decrease in business and personal spending, an increase in unemployment, a decline in real estate prices, and a drop in the stock market.
Now that the Coronavirus outbreak has exploded and the U.S. has surpassed China and Italy for the most confirmed cases worldwide, it is clear the scope of this recession will be of historic proportions. There have also been more than 1 million cases of COVID-19 confirmed worldwide.
With the Senate approving an unprecedented $2 trillion stimulus package on March 25th to provide a boost to an economy being pummeled from the Coronavirus pandemic, I believe we are entering one of the worst recessions we have experienced in decades.
Simply put, this will not be a “normal” recession.
Thankfully, that means there will be unique opportunities for you in the coming months that you may not see again for decades—or depending on your age, ever again during your lifetime.
Why Does a Recession Matter?
Ok, you’re thinking, I get it. The economy is taking a severe hit. Why does that matter to me as an individual person who can’t substantially control it? How is thinking about the doom and gloom going to help me?
It matters because the Coronavirus recession has a silver lining. It is going to be one of the best opportunities of your lifetime to learn investing at discounted prices.
Let me explain. As mentioned above, a recession is an economic cycle in which there is a reduction in economic activity and spending.
When recessions hit, many companies struggle and lose money. There are many reasons for this, but one of the key drivers is that their clients start to conserve money and reduce spending.
This can cause companies to furlough (mandatory suspension without pay) or layoff employees. In some cases, companies may go bankrupt. Unemployment rates jump up. Consumers also get more conservative about their spending.
When this happens, there is less money in the economy, as consumers react by trying to save what money they have and spend less in order to survive.
As a result of these activities, something important happens: The value of most assets decreases.
The power of this is that the next year or two will likely represent one of the best opportunities of your lifetime for buying investments at ridiculously low prices.
If you hold these investments for the long-term, you’ll also benefit from our extremely low long-term capital gains tax rates of only 0 to 20%.
Supply and Demand Shifts
Regardless of which asset type we’re discussing (stocks, real estate, commodities, etc.), the price drops we’re witnessing are the result of a shift in supply versus demand.
When people want cash more than they want assets, the demand for assets drops precipitously. In some cases, more assets also get sold, because people may need to liquidate them in order to get money to buy necessities.
As supply goes up and demand goes down, assets become less valuable.
Meaning, assets get made available for sale at historically low prices.
For example, I own a rental property in a neighborhood of Alexandria, Virginia, near where Amazon HQ2 is going in. The property increased substantially in value following the Amazon HQ2 announcement in late 2018. This is because there was suddenly a spike in demand for housing in that area, while the supply remained constant.
Now, with the COVID-19 recession sweeping our economy, properties in that neighborhood are suddenly less valuable than there were only a few weeks ago. This is because the supply has remained constant, but the demand has suddenly gone down.
Another simple example is the price of used vehicles.
As this recession gets worse, some families with a second or third car will sell them in order to conserve money. As more cars enter the used marketplace and less people want to spend money on acquiring cars, the price you can get for selling one decreases.
On the flip side, you will soon be able to get a phenomenal deal on a quality used vehicle.
(Note: I’m not willing to speculate yet on the price of new cars, because while demand for them has dropped precipitously, so has production in key markets such as China. China accounts for approximately 30% of global car manufacturing and has been the world’s largest automotive manufacturing country since 2009.)
Again, I’m sharing these examples with you because I want you to understand that the price of most assets will fall dramatically in the coming months—and potentially, years.
COVID-19 Stock Market Crash
Perhaps one of the most relevant examples of assets dropping quickly in price as a result of the Coronavirus outbreak is the recent behavior of the stock market.
The stock market entered nearly total free-fall this month. The plunge began on Monday, March 9, with the largest point drop for the Dow Jones Industrial Average (DJIA) in recent history.
Shortly thereafter, on March 12 and March 16, there were two more record-setting point drops.
In total, these three days —which happened within the span of a single week—were three of the worst stock market point drops in U.S. history.
The cause of these stock market drops is global terror about the spread of COVID-19, plunging oil prices, and Federal and State mandates creating widespread business, school and event closures, among other factors.
Only two other days in U.S. history have had more dramatic single-day percentage falls. One was Black Monday on Oct. 19, 1987 (22.6% single day decline) and the other was December 12, 1914 (23.52% single day decline).
To reiterate, the reason this matters to you is that you can now buy stocks, ETFs, index funds, and mutual funds at a major discount compared to only a few weeks ago.
Despite this fear-based sell-off, I don’t think we’ve hit bottom yet. I think further stock price drops will happen as the prolonged scope of this outbreak takes its tolls on businesses and governments worldwide.
If you have cash available and want to learn investing, this means you can learn this skill with less downside and lower prices than only a few weeks ago.
What About Real Estate?
The same thing is going to happen with real estate, it will just be slightly delayed compared to the stock market.
Without a doubt, many people are going to consolidate their housing. Couples who are dating and living separately will drop one rental unit to move into together. Children (of all ages) will move back in with their parents. Anyone who has a spare bedroom will move friends, family or renters into it.
The vast majority of people who have operated AirBnB properties as short-term rentals will also try to convert them to long-term rentals. This will create a flood of new inventory in the rental market.
People who have been furloughed or laid-off may also try to sell properties in order to get cash off which to live. In the commercial sector, an unprecedented number of businesses will be unable to pay their landlords the rent.
Many households will also struggle to qualify for mortgages or financing as one of more of the “breadwinners” sees their job reduced or eliminated. This means, the buyers for real estate properties will also decrease in number.
As a result of this activity, we will soon see more properties for rent and sale across every sector of the real estate market than we have witnessed in years.
This will plunge real estate prices in coming months.
Thus, if you have been thinking about purchasing a primary residence—or an investment property—you are about to have one of the best opportunities of your lifetime to snag these properties at an incredible price.
Investing vs. Speculating
During normal economic periods, I believe in investing as the single best strategy for wealth creation.
This is because investing is predictable and allows you to stack new flows of income on top of each other until you become financially free.
Simply put, an investment is putting out money to get more money back later on from the asset. Not by selling it to someone else, but by what the asset itself will produce.
If you are in investor, you are looking at how the asset is going to perform. Meaning, how much money will it consistently kick off?
This is what I have done with my business investments and my real estate investments. I own them because they perform well and produce income, not because I hope they to go up in value (although, of course, I do want that).
In contrast, when you speculate, you primarily focus on what the price of the object is going to do independent of the asset performance.
Typically, I don’t believe in speculating.
However, this is a unique point in history where their may be some opportunities to speculate if you (potentially) have the opportunity to achieve asymmetrical returns.
By an asymmetrical return I mean that you could acquire assets where you believe you have a limited downside, but a nearly unlimited upside. An example of this would be gambling on the future price of U.S. oil companies.
For example, if you wanted to do this, you could buy a few shares of the United States Oil Fund LP with ticker symbol “USO”.
While you could lose all your money if this fund drops to zero, the fund could also jump back up into the $20s, $30s, $40s or even higher. It has reached all of these price ranges at some point in the past.
Please note that this is not me encouraging you to go buy shares of this fund, because U.S. oil producers have a lot of problems right now.
There is plummeting demand for oil due to lockdowns and travel restrictions, disagreement between OPEC and Russia over production volumes, and Saudi Arabia is reducing oil prices and potentially increasing it own production. Seriously, there could be an oil price war. We could see a wave of bankruptcies across the oil industry.
I don’t own any shares of this fund myself.
Nonetheless, it is an interesting example of situation in which you could potentially achieve an asymmetrical return: You could lose all of your money or you could have it increase 200%, 300% or 500%. You just don’t know.
That my friend, is an example of speculation. The only reason why speculation might make sense now is that we are in an extremely unique moment in history.
However, for most of your lifetime, please focus on increasing your investing skills over your speculation skills.
Investing skills will hold you in much better stead and allow you to systematically replace your active income with your passive income until you become financially free.
Key Takeaways: The Coronavirus Recession
What are the key takeaways you need to know about the current Coronavirus recession?
I’ll summarize them for you:
- Don’t buy assets yet. Let them drop over the next 6 to 12 months and then start price-averaging into them—that is, buying roughly equal amounts as the prices creep up or down. (You won’t know exactly what bottom is, which is why the price averaging approach works well once you think we’re “nearish” the bottom.)
- Don’t buy a home or investment property until real estate prices drop at least 15-30% or more. (It would not shock me to see prices in some markets drop 30-50%).
- Be conservative in your spending, because you don’t know how long this recession will last. If you can add new income streams or acquire news skills, do this now.
- Hoard cash right now so you’ll have it to invest as this recession gets worse.
- The current COVID-19 recession will be one of the best opportunities of your lifetime to purchase assets at a discount.
- Start studying investing now by reading personal finance books, exploring this blog, or following my Instagram Stories in which I answer take Q&A questions. You will want to be confident to pull the trigger when the right opportunities present themselves.
What questions do you have about the Coronavirus recession? Ask them in the comments below and let’s discuss.
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