At the end of every year, financial institutions show their crystal balls and make forecasts for next year. Last year at this time, no financial institution foresaw a pandemic causing 300K deaths in US, spiking the unemployment rate to almost 15%, and jittering the financial market not seen since World War II. We were in the hell. But we will come back. As I read the book To Hell and Back: Europe 1914 -1949 by Ian Kershaw, I cannot help myself thinking how things happened unavoidably and what the driving forces are to overcome those difficulties and move the society forward.
Most of us witness the financial crisis in 2008. But none of us experience the last pandemic, The Great Influenza 100 years ago, comparable in scale with the current one. Back in February this year we were so sad to see doctors deciding who should live and who should die. In March we were shocked to see that the biggest city in US, New York, seemed out of control and ordered shelter in home for almost 8 million people.
Because of the rarity of the black swan events in history it’s impossible to gauge the effects from a statistical point of view. We know that all seven recessions since 1930 averaged a 30% to 35% dip of stock market from peak to trough. Having said that, a qualitative analysis can help us understand how this pandemic will evolve and how the economy will be affected. First, we need to understand that the whole financial system is more stable than before because of the industry regulations after 2008 and the sound economy condition before the pandemic. The financial system has some cushion to resist a pandemic induced financial crisis, esp. with the aid from the new QE program. Second, as pandemic is not complicated man-made crisis, the government can offer economic help in a prompt way. And most important of all the science has been evolving rapidly for the past 100 years. The culprit of this pandemic was quickly located and ready to analyze. New method of developing vaccine has been adopted while the old ones have been improved. In contrast 100 years ago scientists couldn’t find the culprit even years after the end of Great Influenza.
The reason I reflect on what happened this year is that there will be other black swan events in the future. I hope to provide some thoughts how to think in case of future adverse events. And I hope we can keep calm and think about what is different and what is the same for the unforeseeable future.
As for next year’s outlook, LPL Financial provide a handbook Outlook 2021: Powering Forward for your reference. Please see the attached. If you want to discuss with me about it, please don’t hesitate to contact me, as I am always here to help.
Let’s indulge ourselves at the end of the year. Enjoy music, movie, food, companionship. Enjoy ourselves. I wish you and your families, deep in my heart, a Merry Christmas and a Happy New Year!
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