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The shock of the coronavirus and its impact on the U.S. economy and the world economy has been violent and sudden.  Perhaps not since 1929 have we faced such dire impact on our lives. At Hudson Advisors, we are adjusting to what some now call the β€œnew normal.” We do not expect total collapse of our economic and financial system. But we have no illusion about a quick snap back to the way things were in February. We are prepared for a long and grueling period of uncertainty and instability.

That said, we are inherent optimists.  The roots of the U.S. economic and financial system are strong. Our technology and our Federal and state resources will allow us as a nation to deal effectively with both the health issues and the economic issues within a reasonable period of time.

Going from the healthiest economy in decades to a potential depression has made us think deeply about how we and our clients should prepare and execute strategies for the long-term.  Our portfolios contain stocks of the best companies in America. We are cautious about making substantial changes until we have a better sense of the market direction. We do not have perfect solutions at this time. But we are still able to provide our clients encouragement for the future.

The Market:  We do agree with the viewpoint that the worst of the stock market unwind may be over. Most of the recent volatility was driven by hedge funds and speculative investors. Much of their selling was to clear out trades from recent years that used borrowed and leveraged money. Those investors may now have dumped most of their dangerous trading bets. Meanwhile, long-term institutional investors such as pension funds and endowments should  create a stabilizing effect. Their strategies provide for re-allocation into equities after periods of decline.  Also, to the positive, the actions of the Federal Reserve and other central banks have protected the functioning of the markets.

Nonetheless, we may well see periods of further market setback.  The basic determinant will be the course of the pandemic and its economic impact. Even long-term institutional investors may adjust strategies based upon how underlying events unfold. The ongoing behavior of retail investors – most of whom have not yet reacted – is highly unpredictable. We cannot forecast what months of potential bad news about the pandemic will mean for the markets.

The Economy: We are now in the unchartered waters of an induced recession. There is no precedent to know its likely depth or length. The U.S. GDP certainly slipped into negative territory in the first quarter. Forecasts for the second quarter range from a 12% to 25% decline. As of April 2, the Labor Department reported the loss of 10 million jobs in the preceding two weeks. That number is certain to grow.  Unlike most downturns, this one started primarily in the service sector as leisure, entertainment, and travel activities were totally closed.

The impact is global with the coronavirus now present in over 150 countries. As result, some economists are talking about economic declines as steep as the Great Depression. The economy is hostage to the virus as the protection of public health takes priority. We accept that it may take months or longer for the virus to peak and then start to recede. Many parts of the U.S. and many countries around the globe are just in early stages of the pandemic.

Despite this dire situation, there are reasons for optimism. We believe public health officials are expanding capability to contain and manage the virus. We are encouraged at prospect of serological testing for those who contracted the virus with no or mild symptoms and have presumed immunity. This approach may allow a gradual return to work and a phased reopening of the economy. The Federal Reserve and Treasury are acting competently to provide liquidity to large corporations and banks. The Congress has acted to assist small businesses.  More assistance efforts are likely. While coming months may feel like the Great Depression, we do not anticipate years of economic decline.  

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