In this episode, Mary Beth Franklin speaks with Tom Wald of Transamerica to define the big picture of the coronavirus pandemic in terms of how it has affected our economy, our investments, and our everyday lives.
The second season of the Retirement Repair Shop we will be focusing on the coronavirus pandemic and its impact on our lives, our economy, and our finances. The first quarter of 2020 will be remembered as among our country's darkest days. Never before has the world confronted a global pandemic that simultaneously shut down world economies, rattled stock markets, triggered enormous waves of unemployment, and quarantined citizens. Collectively, we are facing fears on multiple fronts. We are scared about a life-threatening virus. We are worried about how our economy will respond when we finally emerge from the lockdown and we're anxious about our personal finances.
Retirement Repair Shop S2Ep1
Tom Wald
4/29/20
Mary Beth:
Hello and welcome to the Retirement Repair Shop. I'm your host, Mary Beth Franklin. This podcast series focuses on retirement challenges and the way to get your financial plans back on track. Today and throughout the second season of the Retirement Repair Shop, we will be focusing on the coronavirus pandemic and its impact on our lives, our economy, and our finances. The first quarter of 2020 will be remembered as among our country's darkest days. Never before has the world confronted a global pandemic that simultaneously shut down world economies, rattled stock markets, triggered enormous waves of unemployment, and quarantined citizens. Collectively, we are facing fears on multiple fronts. We are scared about a life-threatening virus. We are worried about how our economy will respond when we finally emerge from the lockdown and we're anxious about our personal finances. With me today is Tom Wald. He is the chief investment officer of Transamerica Asset Management.
Tom has more than 30 years of investment experience. I am delighted that Tom is our first guest on the new season of The Retirement Repair Shop. Tom will help define the big picture of the coronavirus pandemic in terms of how it has affected our economy, our investments, and our everyday lives. The pandemic has resulted in mass closures of restaurants and retail stores, shutdowns of colleges and universities, mandatory work from home orders and cancellation of every major sporting event.
Tom, in one of your recent blog posts posted on the Transamerica website, you noted that the COVID-19 pandemic quote, "has done what the 1929 stock market crash, Pearl Harbor, the Cuban Missile Crisis, and 9/11 could not do." Let's discuss how to put our financial concerns in context of this new normal and talk about what financial advisors can do now to calm their clients. So welcome to the podcast Tom, and let's begin. How would you describe the current state of the economy?
Tom:
Yeah, so COVID-19 has definitely thrust us into a very nasty recession right now. A recession is most commonly defined as two consecutive quarters of negative economic growth. And we just got our first quarter of negative growth. Preliminarily, I reported this morning we were down 4.8% for the first quarter of this year. But of course, that is not the real story as this current second quarter that we're in right now is in all likelihood going to be the worst individual quarter of economic contraction since the 1930s. When you think about it, Mary Beth, as you just mentioned, COVID-19 is basically frozen everything. It's frozen the sports world, our academic system, daily socializing, shopping, dining, transportation. Pretty much our entire economy and our society. My parents grew up in what history has deemed the Great Depression. In recent years, we have dubbed the financial crisis, the Great Recession and what we're going through right now is starting to be called the Great Lockdown.
So between now and the summer we are likely to see negative GDP growth of perhaps worse than 30% versus this time last year. Also, unemployment, which recently had been at a 50 year low as recently as the end of February, will balloon probably north of 20% by the time all is said and done. And corporate earnings for S and P 500 companies will probably decline in the neighborhood of 25% on a year over year comparison. I mean these are numbers that would have been completely unthinkable just a couple of months ago. And they represent short term levels of contraction that very few and I mean very, very few people alive today have experienced. So COVID-19 has created what I would call an extreme economic shock, capitalize the letters, S H O C K, of historical proportions to our economy.
Mary Beth:
Well those are some fighting words there and certainly a huge change from just a few months ago. And whenever I hear economic downturn compared to 1930s, I immediately think Great Depression. Are you concerned that the recession we are currently in could in fact become a depression and if so, what would that look like?
Tom:
Yeah. Now, I would say we are going to see depression-like numbers. However, I would be very weary to say that we will experience a prolonged and sustained situation of numbers of the sort I just mentioned. And when people talk about a depression, and remember we've only had one depression in our country over the last 125 years and while there are some economic metrics that people look to in terms of specific numbers, really a depression pertains to a longer and more sustained period of time that goes beyond a full typical business cycle. And I think based on some of the things that are happening right now in terms of both improvements to the medical data and the economic stimulus packages, I don't think that the types of numbers I just mentioned that we're going to see over the next three months or so would necessarily continue on a prolonged basis.
Mary Beth:
Well, you mentioned economic stimulus and certainly we have seen unprecedented efforts on part of both the federal reserve board and the federal government. The fed injected more than $2 trillion into the credit markets and it has indicated it's there as necessary. In addition, the federal government has authorized at this point more than about two and a half trillion dollars in loans and stimulus payments to businesses and individuals. The question is, is it enough?
Tom:
No. No, I don't believe that will be enough in my opinion, Mary Beth. And, you mentioned a total of more than $4 trillion in combined monetary and fiscal economic stimulus, you know, which amounts to about 20% of US aggregate GDP. But realistically speaking, that is probably just the beginning. The $2.2 trillion that came from the Coronavirus Aid Relief and Economic Security Act, which is also known as the CARES Act passed by Congress in late March, well, we've already seen about a half trillion dollars added to that just last week. And I believe there's a high probability we will see a CARES Two Act sometime in the second half of the year. And in terms of monetary stimulus, what the fed is doing right now, I would say that is really nothing short of overwhelming and what we can expect to see going forward. You know, if we remember back during the years of 2008 to 2014 in response to the financial crisis back then, the fed took short term rates to zero and bought $4 trillion of bonds in the open market during those six years.
This time around in addition to once taking the fed, in addition to, in addition to once again taking the fed funds rate to zero, they could wind up making open market purchases of perhaps twice that previous amount over maybe a one or two year period, uh, between now and sometime in 2021. And that would include also purchasing private loans issued through the CARES Act. So it's really above and beyond anything really that anyone might've ever thought the fed could or would do. And Mary Beth, the analogy that I've been telling people is that if the fed fought the financial crisis with cannons, they're now fighting COVID-19 with like nuclear missiles. So and it's also important to bear in mind that all of this economic stimulus passed by Congress and enacted by the fed, you know despite the astronomical numbers that we just talked about, should still only be viewed as a bridge. A bridge to get us to the other side of the virus to the point where recovery can get underway because these measures really are not solutions in and of themselves, but meant to be paths to solutions.
And in the end, a full economic recovery will have to be driven by real and meaningful progress in mitigating or eliminating the virus. And of course safely opening up the economy.
Mary Beth:
Well I think the irony as we have just gotten to the point that the economy was fully recovered from the Great Recession it seemed just when this pandemic hit. So that was roughly 10 years after the previous economic downturn and the amount of government stimulus and federal reserve intervention as you said, pales in comparison to what they've done now. The cannon versus the nuclear attack. Are you concerned that these unprecedented measures, what they'll do to future federal budget deficits, government spending and possibly inflation in the future?
Tom:
Yeah, I think anyone would have to be at least somewhat concerned about deficits when we're talking these types of numbers. But unfortunately, given the hand we've been dealt here, there, there really was not much of a choice. COVID-19 you know, has backed us into a corner like never before. And we are catching a bit of a break though in that interest rates are back close to zero and the treasury will be able to finance the stimulus at or near record, record, uh, low rates going forward. You know but we're still looking at several trillion dollars here. So there will have to be a decent return in terms of real economic growth once we're through the worst of all this. Um, I'm a bit less concerned about inflation simply because all of this contraction is creating more of a deflationary environment.
Tom:
And, and throughout the entire economic expansion that you just referenced, that um went from 2009 through the beginning of this year, we never really saw inflation sustain itself above the fed's target of 2% annually. So you know, even when we were at record low, um, unemployment levels, we didn't really see inflation rear its head. But you bring up a great point here, uh, which is that we have never had these types of deficits and associated finances before. And to some degree, it, it will be unchartered waters even after we get through the worst of COVID-19.
Mary Beth:
Well, speaking of other confusing reactions to this pandemic, let's talk the stock market. It has been on a roller coaster since mid-March. It fell about 35% from its peak in mid February to its trough in late March and has been clawing its way back ever since. Now, you mentioned the GDP report that came out, um, showing a 4.8% decline in the first quarter of 2020, much worse than anyone had expected. In fact, it's posted the worst performance since the Great Recession in 2009 and it has ended the longest economic expansion in American history. All dismal news. And yet that same day, the stock market went up nearly 600 points in intraday trading, that's today, April 29th. So can you explain this market rebound despite this ongoing dismal economic news?
Tom:
Yeah, so, um, so Mary Beth, you know, I think first of all, the market is the great discounter of future events. And I think a lot of that 35% decline that we saw in a record period of time from February 19th to March 23rd was the market's recognition of just how bad the economy was going to be as a result of COVID-19. So today's GDP report, which came in at negative 4.8% was a little worse than expected, but the market pretty much knew that was coming. Yet, what the favorable reaction was or has been in today's trading was actually unrelated to the first quarter GDP advanced estimate report that was released before the markets opened. And it was kind of, and, and I was watching this uh, you know, on the news as it hit and it was really quite, a little bit confusing to viewers. But at almost precisely the same scheduled time as the GDP release, uh, the biotech company, Gilead Sciences, announced the results of a clinical trial on their antiviral drug remdesivir in a study of severe COVID-19 patients.
So now this drug, and it just to be clear, this is a drug, it's not a vaccine. So it's a treatment for COVID-19 and not, not a, not a preventive vaccine. But it showed very strong results versus a placebo group. And the market did not know that was going to be reported this morning. It showed you know, in a trial of the severe patients, it showed uh, recovery, uh, an improved recovery rate from 15 days to 11 days versus the placebo group. And it reduced uh, the mortality uh, between the two groups, one quarter from 12% to 8%. so this one drug could be representing statistically significant improvements in the treatment of COVID-19 but not a cure of course. So that was very welcome news and pretty much upstaged the GDP report. But I think what that really emphasizes to investors is on any given day, no one really ever knows what news is actually going to impact the market.
And you know, while you know, a lot of people might have been on sort of pins and needles to see how bad first quarter GDP was, you get something else that comes in and the market has to counter for that uh, uh, and reacts quite, quite, immediately and fortunately this case quite favorably. And I think we're going to see more of that with COVID-19, which is we don't really know from a health and medical perspective ultimately where the future solutions could reside. And as we start to get news like we did today, that's, that's going to have tangible market effects.
Mary Beth:
Well it, it's certainly tangible proof that the market is the leading indicator trading on future and in this case, hopeful news rather than yesterday's bad news. But clients are understandably worried about this extreme market volatility that is happening more rapidly than we've ever seen before. 600 point swings are just all in a day's trading. Um, Particularly clients that are near to retirement, some of them are really concerned about withdrawing money from depressed assets. So since our audience is primarily financial advisors, um, what can they do now to reassure and calm their clients?
Tom:
Yeah, that, that's a great question Mary Beth and you know, there, there are a few things you know, in my opinion. And the first would be you know, kind of exactly what you just said, which is the market is the great discounter of future events. And just as it dropped more than, to drop that 35% in basically the blink of an eye last month once it was beginning to become apparent how painful and negative the economic impacts of COVID-19 were going to be. The market also has the ability to quickly reflect an economic recovery even if that recovery might be a ways out in the future. You know, in the case of what we're seeing right now, I think given the stimulus and the improving medical trends in the virus, you know, this could argue for recovery in late 2020 or early 2021. And the market would likely continue to react quite uh, well to that.
A, a second piece to remember pertains to an old saying that I think everybody's heard, which is history does not necessarily repeat itself, but it does often rhyme. And COVID-19 has created what can be referred to as an economic and financial black swan unlike anything we've seen in our lifetimes. Black Swan is, is, is a term that's officially defined as quote unquote unexpected and unpredictable event with severe and extreme circumstances. So COVID-19 pretty much fits that to a T. So, so one thing we've done is to look back at what historically could be considered other major black swan events over the past century or so.
And we came up with about a dozen or so. World War I, the Spanish flu of 1918, stock market crash of 1929, early World War II in Europe, stagflation in the early 1980s, 9/11 and the financial crisis of 2008. All of those events had severe market reactions and in a couple of them had markets hitting lows actually far worse than what we've seen so far with COVID-19. However, with all of them, the 10 year returns on the S and P 500 after the black swan was reconciled were really quite, quite strong. An average better than 13% on annualized basis and about 250% on a cumulative basis for the following 10 year time frame.
So another really important, important point to remember in my opinion, would be that even in the darkest hours, history infers, it's often worth sticking around for the light. A, a third point is that there is a tendency for investors to focus on calling a market bottom in this type of environment. And that kind of misses the point in our opinion. In any dramatic sell off the market can always drop lower simply on fear and emotion. So trying to call it an exact bottom is, is kind of a fool's errand in our opinion. What we think is more important is identifying long-term entry points in the market. And what I mean by that is sort of price points at which there is a higher probability that above average rates of return can be achieved over multi-year timeframes. And based on you know, several criteria, and a lot of this is sort of moving targets, but factors such as short and long-term interest rates, stock dividend yields, even revise earnings yields, uh, you know, we think we could be right now at or near those types of entry points.
And finally we talked a lot about the fiscal economic, fiscal economic stimulus from Congress and the monetary stimulus coming from the fed. And you know, I referred t, to that as a bridge. And of course it is, however, this stimulus won't, won't be going away in our opinion, once the recovery takes hold. So in my opinion, the, the effects of both the CARES Act with of course any future ad-ons we might see to it and the fed super accommodated policy, I think those will probably stick around for some time and likely become a tailwind during a recovery which could also be favorable for the markets uh, and something to keep in mind. So those are some of the key points I would say that investors and advisors should continue to take into account right now.
Mary Beth:
So it seems for long-term investors there is light at the end of the tunnel. We just don't know how long that tunnel is.
Tom:
Yes.
Mary Beth:
But for retirees and near retirees, their biggest concern is generating income and they are looking at this combination of volatile stock market prices and negative interest rates at this point. How do investors that are looking for income, what do they do in today's market?
Tom:
Yeah, great question. And, and the quest for generating meaningful portfolio income was of course not created by the COVID-19 crisis, but it certainly has been exacerbated by it. Uh, you know, and if I may you know, digress for just a few seconds, whatever I think about how difficult it is in the current environment to generate income. You know, I think back to when I first got into business, in the mid 1980s and the standard kind of retirement staging advice back then was, "Hey own stocks in your twenties and thirties and get a little more balanced in the forties more so in your fifties and by the time you're 65 all that growth you've achieved, uh, you can take that and park it in nice longterm risk-free rates for the rest of your life."
Mary Beth:
Good luck with that.
Tom:
Yeah, I was going to say, you know, the only difference between then and now is, uh, back then the 10 year treasury yield was you know, kind of the mid 11% range. So today the challenge is quite different as a 10 year yield is about 11% lower than when it was back then. So kind of the harsh reality here is that income is very difficult to come by these days. And where that income will come from is far more dynamic than it has been past. We no longer have the luxury of just, as you said, rotating allocations into treasury bonds. Well, well I suppose we do, but we won't get much yield out of it. So investors need to recognize that achieving portfolio yield now comes with higher degrees of credit risk.
Um, you know, you know, income you know, can be achieved from a variety of sources. Corporate bonds, asset backed securities, preferred stocks, even plain old common stocks. But kind of a one area where this potentially can be put in the investors favor is with actively managed portfolios where the managers have a lot of experience and a strong track record of applying strong credit analysis and understanding the relative value between those various different sources of a, on, on the income producing spectrum. So it's, so it's going to require um a, a more dynamic range of where investors will find their income. And that could be changing on an annually uh, you know, or even sort of monthly basis. You know, you know, so, so for better or worse, we are clearly in an era where and we've been in this era for some time where credit analysis will play a larger and more vital role in our ability to retire and stay retired. So you know, advisors and investors may want to lean toward proven managers with a track record of strong credit analysis during what looks to be, as you said, a continuing era of low interest rates.
Mary Beth:
Well, Tom, that seems to be the perfect note to end this interview. Um, clearly this is not a time for amateurs and that financial advisors and investment managers will be earning their keep through uh, these unchartered water of both the market volatility and extremely low interest rates.
Tom:
Very much so.
Mary Beth:
Thank you so much for your insights and your perspective and I enjoyed your imagery of we are now in a nuclear war rather than just cannon fire. But you give me hope that uh, there are probably better days ahead and as we will be exploring in future episodes of The Retirement Report Repair Shop of where investors and their advisors can go for guidance.
Tom:
Well, thank you, Mary Beth. It was very nice to be with you today.
Mary Beth:
A big thanks to Transamerica for making this episode possible. With a history that dates back more than 100 years, Transamerica is recognized as a leading provider of life insurance, retirement, and investment solutions, serving millions of customers throughout the United States. Recognizing the necessity of health and wellness during peak working life, Transamerica's dedicated professionals work to help people take the steps necessary to live better today so they can worry less about tomorrow. Transamerica serves nearly every customer segment, providing a broad range of quality life insurance and investment products, individual and group pension plans, as well as asset management services. For more information, please visit www.Transamerica.com.
If you have a story you'd like to share about a retirement hurdle you're facing, or if you have a question that you'd like to ask one of our experts, contact us here at the retirement repair shop. That's investmentnews.com/repairshop. And you can subscribe on Apple Podcast, Google Play, Spotify, and Stitcher so you never miss an episode.
Speaker 1:
Transamerica Asset Management (TAM), is the asset management business unit of Transamerica. TAM consists of Transamerica Funds, Transamerica Series Trust, and Transamerica Asset Management, Inc., an SEC-registered investment adviser.
Investments are subject to market risk, including the loss of principal.
Investment strategies described may not be suitable for all investor and should not be construed as investment advice or a recommendation for the purchase or sale of any security.
Past performance does not guarantee future results.