Is it reasonable to think the economy is on the upswing?
After all, by one stock market rule of thumb a new bull market started on March 26 when the Dow shot up over the magical 20% mark from the bottom. The bear market (a 20% move downward from the high) lasted a total of 11 days. The stock market is now up over 40% from the bottom.
Yet investors might be wiser to think of this as the eye of the hurricane. This is the view of Ric Edelman, founder of Edelman Financial Engines. In an interview with Karen Demasters published in Financial Advisor magazine on June 26, 2020, Edelman said, “The worst is not over and more bad economic times probably are coming, despite the current upsurge in the market.”
He noted, “Those who expect a return to ‘life before Covid’ are destined for disappointment. Until a vaccine is widely distributed, the economy is not likely to fully recover.”
I would add that even when a vaccine is developed, it will not be widely distributed for 6 to 12 months. People will not resume their pre-Covid spending behaviors overnight. It could take years.
Things are not looking good for the economy. Forty million people filed for unemployment from March 1 to May 29. Even with the stunning addition of 4.8 million jobs in June, the Department of Labor still puts the unemployment rate at 11%, the highest since the Great Depression.
According to the Congressional Budget Office, almost a quarter of Americans increased their credit card debt as the result of the pandemic. In April, 31% of renters and about 7% of homeowners didn’t make their housing payments. The commercial vacancy rate is 17%, the highest since 1991, and with many employees likely to continue working from home, the prospect of a recovery anytime soon is dim.
If you are an investor, don’t let the recent market uptick lull you into a sense of false security.
It’s important to prepare yourself emotionally for the possibility of a worsening economy and possibly another steep downturn in the stock market.
1. Be sure your emergency reserves are topped up. If you are retired and withdrawing from your portfolio, it’s wise to have two or more years in a money market, savings, or checking account. Don’t view this as an investment, but rather insurance. This reserve means you won’t have to tap your portfolio for living expenses when it’s just suffered a huge drop in value.
2. If you couldn’t stand watching your portfolio drop by 50%, make sure it is not heavily invested in stocks. One of my favorite well-diversified portfolios only has 30% in stocks. While the return is about half that of stocks, so is the volatility. Most people don’t need to get the same return as stocks to live well in retirement.
3. Invest in updated technology so you can virtually stay in contact with friends and loved ones, attend virtual gatherings, and partake in tele-medicine appointments.
4. Take precautions against the coronavirus, in part because a physical crisis can destroy your financial and emotional wellbeing. I’ve followed the agonizing stories of 65 people who came down with COVID-19. It is often exponentially worse than a bad case of the flu, and it can do permanent damage to your health. Don’t minimize this virus. Practice the three W’s when you go out: wear a mask, wash your hands, and wait six feet apart.
Finally, follow the classic advice to think long term. We will get through the pandemic. The economy will recover. Both, however, will take time.