What To Do With Your Money During the Coronavirus Recession?

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. 

COVID-19 Recession

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.