What Turns a Healthcare Crisis into a Financial Crisis?

By: CHRIS COOK, CPA, CFA
Partner, Chief Investment Strategist

What turns a healthcare crisis into a financial crisis? One word: Solvency

In our opinion, the race to contain the virus is the very same race against time for many large and small businesses around the world. Can those businesses remain solvent until the customers can come back?

Same goes for individual households. If workers and business owners are cut off from their income sources (restaurant workers, hotels, other service industries), how long can they maintain their bills and debts?

The above has very likely turned a slow growing economy to recession. Financial markets have very quickly (less than one month) traded down as if these forward scenarios will come true. Markets have already priced in what has, in the past, been a normal market response to a recession. We knew that stocks especially would have to weather an economic slowdown at some point, they always do. Through March 16th, the S&P 500 is down 30% from its February peak. We did not know what the catalyst of recession would be. Turns out the villain is a communicable virus.

Measures have been taken to both speed up the containment of the virus and slow down the demise of the economy. Hopefully we are all heeding the intelligent advice of our healthcare community. Please do your part.

The government response regarding the economy has been huge and has borrowed some pages out of the ’08-’09 recession playbook. Whether backing commercial paper markets, pledging financial support for key industries, cutting interest rates, delaying tax payment due dates, contemplating a social security payroll tax holiday, or supporting bank liquidity, the Federal Reserve, Treasury, Administration, and Congress are trying to provide defense against those solvency issues. The financial system that provides day-to-day cash for payroll and money markets is simply strained by the sheer volume in the short term. 

Very different than ’08-’09 is that the financial system is not fending off failed mortgage payments across every financial institution. Bank regulations are tighter than 12 years ago as have been lending standards in nearly every consumer and business category. The financial system was much stronger heading into this crisis than at any time in 2007.

The enemy during this war is clear. It scares people when daily life is altered. And during this time, we have taken the biggest and strongest player on the team off the field, the US Consumer, in asking them to sit on the sidelines for most non-essential spending. When coronavirus is ultimately controlled, the reason for behavioral fear and economic stress will be contained with it. With still historically low unemployment and perhaps months of pent up demand, our best player will be back on the field soon with a full head of steam.

Your Gilbert & Cook team is always here for you. Please don’t hesitate to call us if you have any questions or concerns.