Bear Market – Jun 02
The Economy Could Take A “$82 Trillion Hit In Depression Scenario”
By Editor, Bear Market
My, how fast things can change…
The economy has gone from great to bad to potential depression in less than 3 months.
The Dow Jones Industrial Average (DJIA) closed at its all-time high of 29,551.42 on February 12th, 2020. Things looked great.
Nothing in the short term looked like it was going to stop the longest bull market in United States history from continuing its upward climb.
One month later DJIA crashed by 37.4% to 18,491.93 on March 23rd, 2020 as the coronavirus began its march worldwide.
The market’s recovered somewhat since then. But three months after the market hit its all-time high, we’re now dealing with the highest unemployment since the Great Depression.
And at least in the short term, things are going to get worse… But how much worse?
No one knows for sure… But one study from the University of Cambridge’s Judge Business School showed that in a “depression” scenario the world economy could contract by $82 trillion over the next five years.
This would be an average yearly contraction of $16.4 trillion each of the next 5 years.
The entire world’s economic GDP before this crisis was around $90 trillion.
So, a fall like this would be equal to losing 1 full year of world economic output.
This is the worst-case scenario from the University.
The “consensus” estimate shows a world economic contraction of $26.8 trillion over 5 years. Or an average fall of $5.4 trillion per year.
This is like wiping the 3rd largest economy in the world of Japan off the world’s economic output every year for 5 years.
The universities “optimistic” scenario calls for a world GDP loss of $3.3 trillion over 5 years. Or an average fall of $660 billion per year for 5 years. This is like an economy slightly smaller than the 20th largest in the world in Switzerland going away.
No one knows how bad things will get – or if they’ll clear up tomorrow. But as of this writing, it’s likely that GDP contraction will fall somewhere between the optimistic estimate and the consensus estimate over the next 5 years.
But the exact fall doesn’t matter much.
What does is that the world economy is going to contract in the coming years due to the coronavirus pandemic and subsequent lockdowns.
Why Does This Matter To You?
Because when GDP contracts it means there is less commerce. And fewer products and services are available.
This leads less money available to spend or loan.
This leads to lower demand by consumers.
And these all lead to more business bankruptcies and even higher unemployment then the historic levels we’re already seeing today.
At this point it’s not a matter of if these things happen – they will. At this point it’s a matter of how bad things get economically.
This is important for you not only on a personal level but also for your portfolio as well.
The more businesses that close and the longer this goes on – the higher likelihood is that you own a stock that will either face major cash flow issues at best. Or bankruptcy at worst.
How Do You Avoid That?
You’re probably worried about your investment portfolio for a while… But what should you do to avoid pain in the portfolio?
Here are my top recommendations…
• Own high-quality stocks that have competitive advantage’s
• Owns stocks in companies where the industry they do business in isn’t being harmed by this crisis.
• Own stock in companies that have a lot of cash in relation to little or no debt.
• Own stock in companies that produce a lot of cash flow now and should continue doing so throughout this crisis
These are my general recommendations for you stock portfolio today.
Anything else you should do?
Generate as much cash as you can for a “rainy day” savings fund to use as needed in the coming months of uncertainty.
And stay healthy.
If you own stocks that have the traits mentioned above and you can generate cash, and stay healthy, you’ll be far ahead of most people.
But you may come out of this crisis in a better position than you were when this crisis started.
The key to long term investing in the market is to “stay in the game.”
Meaning buying assets where you’re not going to lose a ton of capital.
If you can do this over a long period of time, you’re almost guaranteed to become wealthy.
Because over the last 100 years the stock markets yearly average return is 10% per year.
If you invest $100,000 at a 10% rate for 25 years, your initial investment turns into $1,083,471.
If you don’t have $100,000 to invest what happens?
The same thing – the process of compounding just takes longer.
If you start with $10,000 and you invest at a 10% rate, you’ll become a millionaire in 49 years.
What happens if things get so bad that the markets collapse? Then we’ll all have a lot more to worry about than our investment portfolios. If that happens, you and I both will worry about how to feed our families.
And what if you don’t own stocks and you’re invested in other asset classes?
That’s a discussion for another day that we’ll have soon.
Team Bear Market