Will COVID-19 cause the next North American recession?

I have recently received several emails from concerned investors asking for my perspective on COVID-19's effects on the global economy. Bear in mind that I'm a portfolio manager who isn't clairvoyant nor a virologist, and who doesn't know the ultimate financial impact of the novel coronavirus. 

Below are the answers to some frequently asked questions:

Why did the stock markets react so negatively to the U.S. Federal Reserve cutting interests rates by half a per cent?

Central banks cut interest rates in order to stimulate the economy. A rate cut is an admission that an economy is struggling and many saw the size of this cut (half a per cent) as a "desperate" move by a panicked central bank. As a result, the markets sold off.    

Will the half point cut in interest rates have the desired effect and help stabilize the economy and stock market?

A drop in interest rates normally encourages people to borrow and spend, thus benefiting an economy and encouraging growth. However, with the coronavirus — unless it's toilet paper — people don't seem to be in a buying mood and that likely won't change until the virus is contained, regardless of how low rates go.

I do believe the rate cut will help stabilize the economy, but not until the coronavirus peaks and begins declining. That's when we should see an uptick in economic activity as global economies recover, demand picks up and businesses increase production. 

How long will the coronavirus disrupt global economies?

It depends on the economy. In China, the virus appears to have peaked and is declining (see chart below), and their economy is normalizing. For example, 85 per cent of Starbucks stores have re-opened and Foxcomm, the company that manufactures the iPhone, expects to resume normal production by the end of March.  

While the Chinese are seeing the light at the end of the tunnel, North America is just entering the tunnel. However, if we follow a trajectory similar to China's, the virus should run its course in a month or two, but as I said at the outset — nobody knows with any certainty.

Do you think the impact of the coronavirus will push our economy into a recession?

We will likely experience a technical recession in 2020. The definition of a recession is a decline in gross domestic product for two or more consecutive quarters. That's just six months of declining growth — which seems plausible given all the slow downs we are experiencing. 

If I'm right, when the word "recession" starts trending — I will take that as a good sign as it often means we are on the road to recovery. In terms of timing, my estimate would be mid-summer when viruses are less prevalent.  

Following a shock-type disruption like a viral outbreak or natural disaster, there is often an uptick in economic activity that helps an economy recover and lifts it out of recession. It is at this point where the stimulus created by the interest rate cuts would take effect.

While I do expect a technical recession — I don't expect it to last long or be as severe as the one we experienced in 2008.

With stock markets down over 10 per cent for the year — is now a good time to invest?

You might be surprised to hear that the Shanghai Stock Exchange has fully recovered since experiencing their big drop on Feb 3. The China Shenzhen Small/Medium index is faring even better, nearing all-time highs. It only took a month for the Chinese markets to recover.

It would be great if the North American markets followed a similar path, but I'm not sure they will. I'm adjusting my portfolio and preparing for the recovery. The volatility will continue for a while so I'm in no rush. 

If — when — the coronavirus officially becomes a "pandemic" or officially causes a "recession," that will likely cause what Baron Rothschild called "blood on the streets," which usually means great buying opportunities. For now, I'll be patient, but I don't think it will be too long before I start bargain hunting.

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