An Economic Tug of War

Our markets continue to rebound from the COVID Correction in March.  On the positive side, we have optimism about the Federal Governments commitment to Stimulus packages and a COVID vaccine as early as November.  On the other side of the rope is weak economic data.

Recent economic data shows signs of improvement.  Unemployment rose by 4.8 million to 17.8 million according to the Bureau of Labor Statistics) and consumer spending is at -6.6%.

The question now is how long will the recession last.  The shortest recession on record lasted just six months and occurred in 1980. Second place: a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic. Five recessions lasted eight months, including the 1957-58 recession that coincided the Asian flu pandemic.

Consumer spending, rebounded by a record 8.2% in June (St. Louis Federal Reserve). Pent-up demand, stimulus checks, generous unemployment benefits, a rise in employment, and reopened businesses supported sales.

Still, not all is rosy. And a strong recovery is not assured, as visibility remains incredibly limited.

 

Forecasting in Today’s Environment

In his testimony before House committee on June 30, Fed Chief Powell said, “Many businesses are opening their doors, hiring is picking up, and spending is increasing. Employment moved higher, and consumer spending rebounded strongly. We have entered an important new phase and have done so sooner than expected.”

But he also recognized the need to keep the virus in check. “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident it is safe to reengage in a broad range of activities,” Powell added.

We are seeing a spike in Covid-19 cases in many states, which is creating a new round of uncertainty. It has fueled choppier day-to-day activity in the market. Yet, at least so far, the strong stock market seems to be coexisting with the rise in cases.

Despite higher infection rates, deaths continue to trend lower providing optimism.

 

V-, U-, L- or W-shaped Recovery

Economists give economic recoveries what might be called a letter grade when discussing possible paths. It’s not the traditional A through F scale. Instead, the letter intuitively describes the shape of the recovery.

A V-shaped recovery would be ideal, as it would represent a robust bounce. Might we get a V? Data in May was unexpectedly strong and cautiously encouraging. However, even during what we might consider more normal times, forecasting is difficult. Today, there’s no playbook and no framework to model outcomes.

We could give you several reasons to see a strong rebound unfolding. We could also give you several reasons why a sluggish recovery might take place.

The strong rebound in stocks since the late-March low is astounding, especially given the economic damage. It suggests the collective wisdom of investors is more optimistic. Fed support, rock bottom interest rates, the reopening trade, and stronger economic data have helped. We believe investors are looking past this year’s hit to corporate profits and are expecting an upturn in 2021. The jump in daily cases has created some renewed volatility, and it bears watching.

Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds.

Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach. It may take time for some businesses to fully recovery. Some never will.

Try to look past continued volatility. However, based on recent economic reports, we may have hit that bottom in April.

 

Financial Planning Lessons From the COVID-19 Crisis

None of us expected an economic upheaval spawned by a health crisis as the year began.

As we discuss some of the lessons and takeaways from the Covid-19 crisis, you’ll probably recognize some of the themes. Let’s not forget that the fundamentals–the core financial precepts–are always the building blocks of any credible financial plan.

  1. Money at the end of your month. Saving for an emergency cannot be underestimated. Three to six months is optimal. But there is an added benefit–financial peace of mind.
  2. Wants vs. needs. Many of us have learned to do without certain things during quarantine. Whether we wanted to or not, we were forced to cut back on certain items.
  3. Diversification and tolerance for risk. We’ve just witnessed an unusual amount of stock market volatility. Calling it a rollercoaster does not fully capture the experience.

 

Our stock market has erased much of its march losses. Yet, how did you fare emotionally when stocks took a beating. Now is the time to reevaluate your tolerance for risk. We’d be happy to assist and make any adjustments as they relate to your longer-term financial goals.

 

  1. Expecting the unexpected. From its March 2009 low to the February 2020 high, the stock market ran strongly for over 10 years. We know market corrections are inevitable, but we recognize steep declines may be unnerving.

 

Nonetheless, a well-diversified portfolio of stocks has historically had an upside bias. That upside bias is incorporated into recommendations we make, as our recommendations are tailored to your individual circumstances and goals.

Further, a healthy mix of bonds helped cushion the decline. While we monitor events and the markets over a shorter-term period, let’s be careful not to take our eyes off your longer-term goals.

Be Proactive, Not Reactive

The steps above are a broad overview and your circumstances may vary. Taking inventory is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a better position than you realized. As always, we are here to help.

We hope you’ve found this review to be helpful and educational.  We understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced. If you have questions or concerns, let’s have a conversation. That’s what we are here for.

As always, we are honored and humbled you have given us the opportunity to serve as your financial advisor.