If the coronavirus, recession angst or elections are keeping you up at night or have generally increased your level of anxiety, you can take comfort in knowing that what you’re feeling is natural. In fact, our brains are primed for an anxiety response during times of heightened uncertainty. At least that’s according to one research paper published in the journal Nature. And as the researchers point out, higher levels of uncertainty disrupt our ability to assign clear probabilities of success to our desired life plans and goals. When this happens, chemical messengers tend to activate the same centers that control the “fight or flight” response in our brains. The result?
When anxieties build to the point that a fight or flight response is activated, panic can ensue, leading to a set of decisions and actions that may appear irrational in hindsight, yet seeming rational in the moment. From a financial perspective, panicked behavior can include anything from hoarding resources or doubling down on losing bets to selling fundamentally sound investments during a bout of financial market and economic volatility. And while anxiety may build during periods of uncertainty, panic may not be a foregone conclusion during these times. To be sure, the solution may lie in the act of exposure, desensitization and acceptance. So what exactly do we mean here?
Who me, worry?
Well, the idea is that repeated exposure to the things that trouble us the most can, over time, desensitize our brain to our concerns, reduce anxiety and dull our innate panic response and generally increasing one’s ability to constructively deal with highly uncertain events. While this approach is more actively utilized in treating patients with certain phobias like fears of animals or insects, the process can be useful in reducing financial anxieties at a broad level. How so? Well, this can be accomplished by actively embracing the potential for a negative outcome, putting the possible consequence in context and developing tangible action steps to help mitigate their expected negative effects.
Let’s revisit what could go wrong from a financial perspective as a result of the coronavirus outbreak. In brief, we believe that the coronavirus has had both direct and indirect impacts on the global economy that are yet to be determined. Either way, in the most affected parts of the world, like China, the direct effects have been lower consumer spending and business activity resulting from mandatory quarantine and self-isolation on account of the coronavirus. One of the indirect effects of the outbreak has been supply chain disruptions that are making it harder for firms in less affected countries (like the U.S.) to get the products they need to do business.
What this means is that global economic growth is likely to suffer in the coming months as household spending and business activity fall (assuming that a solution to the outbreak is not found soon). While risk assets have in recent days bounced in response to global monetary and proposed fiscal support, the fact is that corporate earnings growth is likely to slow in the months ahead, making assets like stocks more expensive. And as the risk of a U.S. recession rises, we expect economic and financial market volatility to remain elevated for quite some time. So, what can households and investors do to prepare amidst increasing uncertainties?
Figure 1: U.S. recession risks remain elevated
Gain some perspective
For starters, gain some historical perspective and keep an eye on the future. While the coronavirus has not yet been characterized as a pandemic by the World Health Organization (WHO), it could be on track to be more disruptive than the H1N1 virus of 2009. Even so, what’s important to note amidst today’s developments is that in some ways we’ve been here before.
In fact, as a civilization we dealt with a host of health epidemics in the 20th and 21st century, in the last 100 years the global economy has weathered 30 major military conflicts and six global recessions since 1970. During this time, we’ve also witnessed the rise and fall of various political and economic systems and yet, by some measures, global wealth has steadily risen, and poverty levels have fallen. What’s the point?
The point is that despite the concerns surrounding the coronavirus, state of the economy or potentially disruptive nature of elections this year, over the long term economic and financial market conditions are more likely than not to rise in the future. While market volatility and uncertainty can generate uncomfortable feelings in the near term, it is also helpful to remember is that similar events have come and gone over the years. Therefore, revisiting and staying committed to long term goals could help even the most anxious households and investors better navigate near-term uncertainties.
Take action today
Besides gaining some perspective and staying focused on long term goals, what are some tangible actions that households and investors can take to navigate short term economic and financial market volatility? First, build up your cash reserves to help prepare for the unexpected. This includes boosting cash flows by reducing non-essential household spending and lowering interest expenses by refinancing high cost debts. This is important because we expect employment conditions to become less solid should economic uncertainty increase in the months ahead. Therefore, having enough cash on hand to cover 6-12 months of living expenses will be key to bridging disruptive life events.
Next, we recommend investors avoid trying to time the market bottom or, alternatively, selling everything and going to cash. Rather, at this juncture our advice for investors is to keep an attitude toward investing that is rooted in fundamentals and maintaining broad exposure to the markets. This begins with ensuring that portfolio allocations are strategically aligned with long-term goals. And with the market poised to move lower in the near term, we believe that now is the time to look for investment opportunities in solid defensive names, like consumer staple companies, that are positioned to weather periods of sustained market volatility.
Finally, when the economic and market outlook begins to feel out of control, we recommend embracing radical acceptance. That is, accepting life as it is and not resisting what can’t be changed. To be sure, there are arguably more topics of great consequence today creating angst than there has been in years. And while it may be tempting to take a passive posture towards today’s uncertainties, we believe that now more than ever is the time to begin taking proactive steps to preserve long-term goals. This includes educating (exposing) yourself about the potential effects of today’s events, staying rooted in a historical perspective and taking proactive steps to ensure that you can weather near term economic volatility to achieve your long-term goals.