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How COVID 19 Crunch Compares To Spanish Flu, Great Depression

I am certain of one thing about COVID-19: nobody on the planet knows how much death and damage to the economy and stock prices it will ultimately wreak.

Compared to previous catastrophes like the so-called Spanish flu of 1918 and 1919, COVID-19 has so far caused far fewer deaths. As of the morning of April 6, 2020, 70,530 people had died from COVID-19 out of 7.8 billion people on the planet – that represents 0.0009% of the world population.

Back in 1919, when the globe hosted 1.8 billion people, Spanish flu had claimed the lives of an estimated 50 million people – 2.8% of the world’s population. The Great Depression’s toll on the economy, employment and the stock market was ultimately much worse than the damage so far inflicted by COVID-19. How much worse will that damage get?

COVID-19 Impact on Economic Output

During the Great Depression which began in 1929, GDP plunged 50% from $105 billion in 1929 to $57 billion in 1932. One reason for the drop in GDP was deflation – between 1929 and 1932, the average level of prices fell 30% — wiping out those who were obliged to repay debt in currency that was not adjusted for inflation, according to the balance.

Nobody knows how much economic contraction will be caused by COVID-19. On March 31, Goldman Sachs GS predicted COVID-19 would cut U.S. GDP by 34% in the second quarter of 2020 and by 6.2% for all of 2020, according to CNBC.

Morningstar MORN constructed several scenarios and its base case envisioned a 5% decline in 2020 U.S. GDP – roughly in the middle of its optimistic and pessimistic scenarios. Morningstar expects global GDP to decline 1.4% in 2020 akin to what happened in the 2008 recession (and a big change from the 3.4% global growth it had predicted for 2020).

These forecasts seem optimistic when considering that as of April 5, Moody’s estimated that with the closure of counties that account for 96% of U.S. national output, U.S. daily output has plunged about 29% since the first week of March 2020, according to the Wall Street Journal. If that 29% drop continues for two more months, U.S. output would be down 75% in the second quarter of 2020, Moody’s chief economist Mark Zandi told the Journal.

“This is a natural disaster. There’s nothing in the Great Depression that is analogous to what we’re experiencing now.”

Mark Zandi, Moody’s chief economist, Wall Street Journal, April 5, 2020

COVID-19 Impact on Employment

The Great Depression caused an exceptionally high level of joblessness. Between 1928 and 1932, the unemployment rate soared from 3.2% to 24.9% – the highest rate in American history, according to the balance. By April 2, U.S. jobless claims in the previous two weeks had totaled nearly 10 million. That day, the U.S. reported about 6.6 million jobless claims, according to CNN, nearly 10 times more than the previous weekly high of 695,000 in 1982.

Goldman Sachs predicted that unemployment in the U.S. would spike to 15% in the second quarter of 2020, according to CNBC. However, The St. Louis Federal Reserve estimated in March 2020 that the unemployment rate could hit a whopping 32% amid 47 million layoffs, according to CNBC.

Zandi emphasized that his model did not take into account the economic effect of how much less all the millions of newly unemployed will be spending — which is particularly relevant given that 70% of economic growth (or decline) is related to consumer spending.

COVID-19 Impact on Stocks

As measured by the percentage of decline, the hardest hit in the Great Depression were those who owned stock. Between 1929 and 1932 the stock market lost 90% of its value and took a quarter of a century to recover to its pre-crash level, according to the balance. The 2008 financial crisis cut the Dow roughly in half. From its October 2007 peak of 14,164.53.1, the Dow fell 53% to bottom out at 6,594.44 by March 2009. 

So far COVID-19 has slashed the value of stocks less severely. By April 3, the S&P 500 had fallen about 26% from its February 20 peak. I have struggled to find anyone willing to predict how much further stocks will fall.

Implications For Leaders: Construct Base Case, Optimistic and Pessimistic Scenarios

Since nobody knows what the future will bring for the world during this pandemic, I agree with those who are constructing base-, optimistic- and worst-case scenarios. Scenarios force decision makers to be explicit about their assumptions and to think about contingency planning — what they can do to make things better under each scenario.

Whether you are running a country, a hospital, a restaurant, or a videoconferencing company, one common set of assumptions have to do with how soon the number of new COVID-19 cases drops and dwindles close to zero.

The answer to that question varies by location and by how effectively social distancing and shelter in place policies are implemented. My guess is that two other factors are critical: the ubiquitous availability of effective and quick COVID-19 tests and how soon a safe and effective COVID-19 vaccine can be developed.

Without the tests, any workplace where people would congregate every day cannot safely reopen. Once such tests are available, the healthy can be admitted and the infected can be treated without endangering people in the workplace. And until a vaccine is widely available — which optimistically is not expected for 12 to 18 months — there is little chance of things returning to normal.

Morningstar’s base case and optimistic scenarios would return things to normal in the U.S. sometime in the summer. Its base case assumes a three-month broad shutdown that ends in April or May 2020.

In this scenario schools reopen during the summer resulting in a more moderate second wave of infection through the end of 2020 as treatments to mitigate symptoms become available. In the optimistic case, businesses mostly reopen by June 2020 as treatments for COVID-19 become available.

Morningstar’s pessimistic scenario envisions too many people failing to comply with self-distancing policies, overwhelming the U.S. health care system as a COVID-19 treatment remains elusive.

What should investors do?

The answer depends on your cash position, cash burn rate, and how long you think it will take for stocks to rise again. If you need the cash to survive, sell. If you can keep going without selling your stocks, keep investing every month.

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