As we all begin our new social distancing routines, the economic impact is being felt immediately. OpenTable has been providing data on diners at their nearly 60,000 restaurants, and we can see the impact day to day. The data includes online reservations, phone reservations, and walk-ins and is viewable here: https://www.opentable.com/state-of-industry
Dining trends started down in the beginning of March but have fallen off a cliff in the last few days. As of yesterday March 16, total diners were down 52% across the United States. Hard-hit states like California and Washington are down 70%. Ohio closed its restaurants Sunday night, and other states are following quickly. The numbers will continue to crater.
The fallout is not limited to the restaurant industry and is moving fast. Retailers are closing stores, gyms are closing, events cancelled, theme parks are closed. Vegas is closing hotels and casinos. Hilton’s CEO expects hotel occupancy to be 10-15% all over the world compared to 76% in 2019. Marriott will furlough tens of thousands of employees who will not be paid during the crisis. The immediately effects in travel and leisure will spill over as many lose their jobs. Ohio said they received over 45,000 unemployment claims this week compared to 6,500 last week. That’s just one state. National initial unemployment claims are released weekly on Thursdays, and those numbers could soar.
No one has seen anything like this. The fallout could be severe, with cascading effects as job and income losses cause all businesses and households to cut back spending. No industry will be untouched.
Coming into 2020 I believed a recession was unlikely. Now, the recession is here.
The sudden stop to a huge amount of economic activity will undoubtedly cause the recession to be severe, but no one knows the answer to the most important question, which is how long it will last. Hence why the stock market has been so wild the past few weeks. This was the fastest period from all-time highs to bear market in history. The past four trading days have seen two of the five largest percentage declines for the Dow Jones, as well as one of the ten largest gains. Investors are all trying to figure out the economic fallout in real time, and uncertainty reigns.
There are reasons to believe that whatever, the period, we can get through it. The government is mustering an economic response. The Federal Reserve cut rates to zero and is taking steps to ensure liquidity in the markets. Washington is working on a stimulus package. Industries may be bailed out. I won’t go into the back and forth of what such a package should look like, except to say it should be large and fast, as people losing jobs and seeing incomes cut will need to pay the rent and buy groceries.
But the economy cannot arrest its decline and recover until the virus is contained. How long will that take? There are stories that life is slowly coming back to normal in China. Travel restrictions are being eased. Apple reopening its stores after being shut down for a month. Italy, however, remains under lockdown, and their delayed action is more akin to the United States. So, while there is hope that the impact can be short, we cannot assume the outcome. The biggest reason for hope is that now everyone is taking this seriously, but the more closures, the more social distancing, the deeper the economic impact.
What should investors do? My specialty is stocks, so I will assume you have the long-term time horizon and risk tolerance to invest in the stock market. I believe the key is to focus on the long-term durability of the business and its survivability in the near term. This means investing in businesses that will be doing exactly the same thing in a year or two when this passes as they were doing a few months ago before this started. Most importantly, it also means examining a company’s balance sheets, fixed costs and cash generation to understand how long it can go with a severe reduction in revenue. Survivability is key. Don’t bet on bailouts or that a cure is around the corner. We will beat the coronavirus, but a risk conscious investor needs to assume this recession can last longer than many predict.
If anyone is looking to chat about investments or talk through ideas, don’t hesitate to reach out.
– Greg