HOW DO YOU ADDRESS THE ECONOMIC DAMAGE FROM A PANDEMIC?

We cannot be sure that we will ever fully eradicate COVID-19 from our lives but it is becoming clearer that masks, social distancing and now even more importantly, vaccines are reducing the risks of the virus. What are the implications for the economy and your investments?

We researched the 1918-1920 Influenza Pandemic to learn how the recovery played out then. was being waged when the pandemic began. An estimated 500 million people in the world were infected. It killed 50 million people including 675,000 Americans (about 0.67% of the population; at 550,000 COVID- related deaths as of this writing that equates to about 0.16% of the U.S. population today). While COVID-19 mostly impacts the elderly, the 1918 Flu took the biggest toll on younger people who comprised the bulk of the physical labor force at the time.

How did the markets perform during the Flu years? Interestingly, in 1917 the Dow Jones Industrial Average dropped 21.7%. The following two years while the pandemic raged, the market increased 10.5% in 1918 and another 30.5% in 1919. Similar to today the stock markets performed well despite restrictions on public gatherings. In 1918 the Commercial and Financial Chronicle, a leading business news outlet at that time, reported: “In Boston the question of closing the churches is being discussed as a mean of checking the epidemic. In Pennsylvania all places of public amusement, schools, churches and all saloons have been ordered closed until further notice.” The Surgeon General of the US at the time said that these closings are: “the only way to stop the spread of the virus”. While social distancing was practiced in certain areas of society it was not enforced in the factories, mines and shipyards because the US government was pressuring businesses to meet the demand for goods necessary to wage World War I. This brings us to the main reason why the US economy did not massively contract in 1918: the War. Real government spending comprised 38% of GDP in 2018. Of the labor force between the ages of 15 and 44 6% were in the armed services. As the Chronicle

wrote: “Towering above every other form of trade activity is the vast business in a hundred avenues of industry to supply the needs of the United States Government and Allied Powers in these momentous days”. The government’s spending more than compensated for the reduction of private investment activity. There were regional labor shortages due to deaths from the Flu but the massive demand for coal, steel, machinery, textiles and other goods by the government more than offset these local Flu-related problems. The economy did go into a recession in 1920 and 1921; many economists attribute this slowdown to the return of the troops to the workforce which couldn’t fully absorb them as the economy was slowly shifting from a wartime to a peacetime economy. During this recession, the stock market fell 47% from the peak on November 3, 1919 to its bottom on , 1921. From there, the Roaring 20s were launched and the Dow Jones Industrial average increased approximately 600% from the August 1921 lows to the next peak in September 1929. The Ragen Group’s economic takeaway from the 1918 Influenza Pandemic? When a shock to the system both on the supply and demand side occurs such as COVID-19, history has shown that no economy is strong enough to get to the other side on its own. Some form of government assistance is needed to bridge the gap between the economic shutdowns necessary to tame the virus and the reopening of the economy. In 1918, the War provided the justification for massive government spending. In 2020 the US passed the CARES Act which amounted to $2.2 trillion of government spending. In March 2021 the US passed the $1.9 trillion Covid Relief Bill. US 2020 GDP was approximately $21 trillion so these government spending packages amount to approximately 15% of GDP. As we hopefully get past the pandemic the Ragen Group is pondering two questions: How much government spending is too much? Will government spending lead to inflationary pressures causing interest rates to rise? We will attempt to answer the second question and its impact on our stock portfolios in our May newsletter.

Sincerely,

The Ragen Group Baird 925 Fourth Avenue, Suite 3600 Seattle, WA 98104 206-664-8850 JG2021-0326

Robert W. Baird & Co. Incorporated. 777 East Wisconsin Avenue, Milwaukee, WI 53202. 800-RW-BAIRD. rwbaird.com.