Financial tips to prepare for the upcoming COVID-19 recession

With the recent COVID-19 outbreak, people all over the world are confined within their homes, in fear of a highly contagious virus that has already spun a pandemic. However, the second concern many of us have are the economic consequences of this situation.

First of all, government regulations are about keeping people safe and stopping the spread of the virus that could collapse the Health system worldwide. With this, businesses are closed, workers have been furloughed or are currently unemployed, and many markets have taken huge hits, such as Tourism, Air Travel, Entertainment and most of all, medium and small businesses. 

As a consequence, economists and financial specialists have forecasted a recession for the near future, if it is not already in place. A recession is a decline in gross domestic product (GDP) for two consecutive quarters, and because this situation is developing quickly, it has been difficult to predict what is in stall for us in the next few months. 

Now, what is a reality for many of us individually is unemployment, insecurity for our business, unpaid suppliers, bank loans, etcetera. Therefore, we must prepare ourselves for the looming future, since the outlook may still be grim. 

These are a few recommendations that can help you be better equipped to deal with a recession:

  1. Re-evaluate your spending habits 

An important first step, is coming to a full understanding of our spending habits. Since we are spending most of our time at home, our habits immediately change, and we have to take the opportunity to look at our expenses from a different perspective. 

First, some things have automatically changed, for example, we are spending less money on transportation or gas and more money on our electricity and water bills from spending more time at home. Furthermore, all our entertainment budget has shifted from going to the movies, sports games or concerts, to subscribing to more streaming platforms or buying more board games, videogames, etc. 

This way, you can see the unnecessary things you were spending at, and then, will be able to cut back on those things and maybe start adding the same amounts to an emergency fund -very necessary in times of recession. 

If your job feels uncertain, your business is shaking or you are struggling to earn money, the first thing you will have to do, is see where you can make savings and define which are your priorities. 

  1. Cut back on expenses  

Now that we have seen where we are wasting our money, it is time to completely cut those expenses (at least until the crisis passes). 

Some easy ways to do that can be switching to a cheaper cell phone plan, ask for lower insurance premiums for your car and house or choose between cable or streaming services. You can also try to lower your bills by having a more careful use of the water and electricity in your home. 

Unplug all electronics when they are not in use, take advantage of the sunlight and avoid charging your phone all night. On the other hand, try to have shorter showers and not to leave the water tap open while brushing your teeth, hands, or showering. You can also check the https://www.lowermybills.com/  website for more help with your bills. 

Furthermore, even though your eating out habits may be over, think about how much money you are spending on take out or home delivery services. A better and healthier alternative is to learn how to cook and experiment with different ingredients and recipes, it is a great opportunity to make the most of your time at home and to learn or improve a new skill – while saving money. How great is that? 

Finally, focus on low cost entertainment or family time. When we have lots of free time confined between four walls, our decision-making can be affected, specially when children are around. We may be inclined to buy every single whim to keep your children entertained, without thinking of your credit card bills. 

Try to innovate with things you have around your house, promote the use of creativity in your children, surf the web for fun ideas to do and just take advantage of the time you get to spend with your family. All of this does not require any money, and it will improve your family relations.

  1. Do not panic

The first thing many people start to think is to seize the moment, and live as best as you can now, etc. However, by doing so, we may be sacrificing our long-term security. 

I know it is easy to think that the coronavirus crisis will never end, but it will. And we should be spending and taking care of our money for the future. 

To highlight, these are the most important things we should all be doing whether we still have our jobs or not:

  • First and foremost, you want to build up your emergency fund as soon as possible. The way to do that is to spend less money than you make and put the difference in a savings account.  

Take the money you usually spent on gas, eating out, entertainment, etc. And put it all into your emergency fund (which if you don’t have one already, it is the perfect time to start) that should ideally make up for at least 3 months of your essential expenses, so you can survive in a crisis or world pandemic. 

  • Avoid making big -or small- purchases for the time being, since the last thing you want is to hurt the finances that will come to haunt you in the future. Unless you are sitting in piles of cash, you do not want to take on new debt obligations, specially in times of uncertainty like these. 

The coronavirus crisis will eventually pass, and there will still be deals on those big-ticket items on your list when this is all over.

  • If you still have job security, try paying as much of your debt as soon as possible. And take advantage of the release measures from the government of your country. Many banks, loaners, tenants, etc. are taking into account the world financial situation and you will probably be able to reach an agreement with them to help you release some of your obligations at least until the pandemic ceases. 

Bear markets in history and what is happening today with COVID-19

Bear markets are a natural part of market cycles, but it can be difficult to anticipate them, know how long they will last or how much they will affect stock prices. However, we can analyze the reasons and behaviors of other historic moments when rates entered a “Bear market”, which by definition is a falling market where financial asset prices fall by 20% and widespread pessimism causes negative sentiment to persist. 

Black Monday (1987)

Black Monday occurred on October 19, 1987, when the U.S. stock market rates fell by about 20%. This event marked the beginning of a global stock market crash, and the so-called “Black Monday” became one of the most important days in financial history, since, by the end of October, most of the major stock rates worldwide would have fallen more than 20% as well. The cause of this massive collapse in the market was due to a trading system that began to perceive a sharp increase in risk and triggered a massive sale of securities.

It is generally believed that several events came together to create a panic atmosphere that sent the sell signal within the system and, likewise, among investors. For example, the U.S. trade deficit widened with respect to other countries. Crises, such as the Kuwait-Iran standoff that threatened to disrupt oil supplies, were also a concern among investors, and eventually the role of the media was an amplifying factor to the severity of events at the time.

While there are many theories that try to explain why this fall occurred, most people in the media agree that the mass panic caused the fall to intensify since, prior to this event, the index was already showing constant declines since October 6, 1987. However, the S&P 500 managed to recover again its level registered on October 5, prior to these events until July 1989. 

Dotcom (2000)

The dotcom bubble, also known as the internet bubble, was a rapid increase in the valuations of new technological innovation stations, given the increase in speculative operations that strongly boosted the price of shares during the 1990s, which generated exponential growth in stock rates. 

Investors were aware that in the early years these companies would have difficulty generating income, however, as the years went by, quarterly results continued to deteriorate so much that investors began to inquire about the ability of the companies to actually stay afloat, and began withdrawing capital from them, triggering a massive global sale. 

A few years later, the American markets were again affected by the events of September 11, 2001, and by the end of 2002, most of the Dotcom companies had gone bankrupt. The S&P500 fell back -49.77% over a period of approximately 25 months, beginning in September 2000 and ending in the same month, but it was not until 2002 that it began a rebound that would allow it to recover these losses in 2007. 

Real Estate Bubble (2008)

The collapse of the housing market, the 2008 mortgage crisis or the global financial crisis are some of the names given to the approximate 18-month period, which began in October 2007 and ended in March 2009, a period in which the S&P 500 lost 57.69% of its value and, globally, about 30%. 

The events occurred continuously and left less room for banks and the US government to maneuver. By December 2007, the United States had fallen into a recession. By early July 2008, the Dow Jones stock index would trade below 11,000 units for the first time in more than two years. 

On Sunday, September 7, 2008, with financial markets falling almost 20% from their October 2007 peaks, the U.S. government announced the acquisition of Fannie Mae and Freddie Mac as a result of the losses recorded by these banks given their strong exposure to the collapse of the sub-prime market. 

A week later, on September 14, major investment firm Lehman Brothers recorded losses greater than the company’s value given its own overexposure to the subprime market and announced the largest bankruptcy filing in U.S. history at that time. The next day, the markets continued to plummet until March 2009, after the largest bank bailout in the country’s financial history was announced, for more than $700 billion. 

Falling markets by Covid-19 (2020)

The volatility seen in the financial markets over the past 4 weeks now reflects the deep uncertainty about the near future of the world economy. Since, as we could see in China in its decision to preserve the lives of its infected citizens and prevent an increase in the spread of the virus, a period of quarantine was determined which affected different productive chains, leaving the economy of that country severely impacted. 

However, at that time the spread of Covid-19 was not seen as a risk that could impact international markets, but the situation changed when it began to spread in different parts of the world and, where they have implemented different methodologies of quarantine or isolation in order to avoid a massive contagion. The measures taken by governments have had a strong impact on the markets as they will end up significantly affecting different sectors of their economy, which will end up in a recession. Thus, as of 19 February, a slight decline began in the main international stock indexes, which was triggered by a massive sale due to the strong increase in risks. 

Finally, as we have seen, bear markets are a natural part of the economy, and there are many resources for international financial instruments to help the markets recover. However, it is a process that has always taken time, and we need to be patient to where the outcome of this disease will take us. 

How is 2020 economy being affected by coronavirus?

The global shutdown brought by the coronavirus pandemic has sent the world’s economy to a striking low. With people fearing for their jobs, companies shut down and entire countries in lockdown, the global economy is being affected gravely.

There is an article by the New York Times explaining a simple idea of how capitalism works and how it is in danger these days. First of all, one person’s spending is another person’s income. And without leaving our homes to prevent the spread of one virus, we cannot consume. That is a small but giant realization that the economy is about to take a big hit. 

Despite these assumptions, this economic pandemic is something the modern world has never experienced before. Therefore, we do not know the extent to which it could lead and the consequences it may have.

According to a recent poll made by the World Economic Forum, concerns about employment and businesses have rapidly increased since February, particularly in Italy, France, the UK and the US. In these countries, economic concerns appear to have risen more steeply than concerns relating to the level of threat posed by the virus. 

It is clear that the public sees coronavirus as a greater threat to the economy than to their health. Furthermore, economic rescue measures announced by governments do not appear to be calming concern.

The affected areas

In the next weeks with self-quarantines, there are main areas that are at major risk: 

Transportation, which includes things like plane tickets, train, bus, and metro fares. People travelling for business or pleasure, to go to school or simply move from one place to another. This category does not include the purchase of personal automobiles.

Another area is entertainment, with billions of dollars being lost due to the large amount of cancelled sport events, concerts, festivals, etc. Movie theatres, gyms, and even casinos that are shutting down due to the new shelter-in-place recommendations. 

And the market with the largest payrolls is food and accommodation, meaning restaurants and bars, hotels and other lodging. People are not eating out, going to bars or meetings and they are not allowed to travel due to the risk it poses to spreading the virus. 

The five sectors experiencing the most direct and immediate collapse in demand or facing government-mandated shutdowns because of coronavirus are air transportation; performing arts and sports; gambling and recreation; hotels and other lodging; and restaurants and bars. Together they accounted for almost 10% of the total employee compensation in America (2008).

These industries where workers will not have enough compensations to fulfil their normal obligations to themselves, their families, and their countries. Simply the potential effects that empty airplanes and hotel rooms, millions of waiters, chefs and flight attendants, are devastating. 

Although there are things with an offsetting effect such as more groceries being bought, shopping online and more investments on medicines and healthcare services, these things are hardly going to compensate for the huge void other sectors are leaving and the ripple effect this has on the banking system, on debt and unemployment.

What can be done to help? 

Even though the overlook is grim, there are things that can help the global economy get back on its feet. First of all, contrary to the benefits of self-isolation to prevent the spread of the virus, the best thing that can be done for the economy is staying together. This means that even tough the borders of many countries are closed for health reasons; they should work together in collaboration to get out of the massive recession the world is facing. 

First of all, the priority now needs to be the immediate needs of pandemic management, with governments collaborating to accelerate the development of vaccines, to produce urgently needed medical equipment and other supplies, and to coordinate restrictions on movement and the treatment of foreign nationals.

But the world also needs a coordinated economic response. Vulnerable governments that risk buckling under the strain of the pandemic require financial support to prevent the global health crisis from also becoming a financial crisis. 

Apart from a coordinated response from international organizations, we need people to start consuming and supporting their local economy. Since people with small local businesses are likely to suffer almost immediately from the lack of customers, we need to help in any way we can.

For example, many businesses are implementing home deliveries of products like groceries, medicines and even things like fashion items. Let’s support local businesses and store-owners, instead of going shopping to the large supermarket chains, go to the local market, order your groceries online with your neighbor, give your freelancer friend some work, and with these small actions, we can all work together from every level to soften the economic blow that the coronavirus health emergency is bringing on us.