- \ Gerard Gruber
- June 23, 2020
!Financial advice in Covid19 time
When financial markets fall, the first thing on everyone’s mind is recovery. When will it happen? What will it look like? How long will it take? These are natural reactions since losses in the market feel twice as painful as gains are pleasurable. [i]
But an interesting thing is happening in our economy today. The stock markets are hinting at a V-shape recovery despite the remainder of the economy’s seemingly accelerating free fall. Since hitting record lows in mid-March, the S&P 500 was up more than 36% at the end of May. COVID-19 may have spurred a rapid decline, but the market seems to be rebounding just as quickly.
Even though unemployment is at a record high and corporate and sovereign debts are blowing through the roof, consumers are still investing in the stock market. Some say investors are experiencing FOMO, or the “fear of missing out,” jumping into the market while asset prices are depressed.
But is a true V-shape recovery in such a short period of time truly sustainable? What is attributing to this buoyancy? Should we expect things to get better or worse?
What’s Keeping Stocks Afloat?
Of course, moves made the Fed and the liquidity created by Congress under the CARES Act are key contributors to this market’s high marks. With talks of further stimulus underway, consumers may believe that different forms of government assistance will be enough to carry us through until the economy fully re-opens. Spending appears to continue with this assumption in mind.
Escalated unemployment assistance also contributes to this sense of security. At this juncture, millions of Americans continue to receive unemployment benefits that outpace what they would be making at their actual jobs. Essentially, unemployment stimulus benefits are making unemployment more lucrative than actually working. Why would anyone choose to jump back into the workforce only to receive less money? What is the incentive to return to work?
While the current unemployment benefits are set to expire at the end of July, some speculate that further Coronavirus relief could extend this relief through the end of the year. This is a problem that has been brought to the table in the Senate where officers are exploring other options, such as offering cash incentives for unemployed Americans returning to work to help get the economy running again.
Great Expectations?
At the end of the day, no one knows for sure how long consumer confidence will last or if the market will continue on its upward trend. A few negative events could quickly send the markets back into bear territory. Take, for example, the possibility that extended stimulus plans are not approved or riots continue and/or worsen. Consumers could panic, stop feeding the market, and cause stocks to plummet once again.
At Harbor West, we anticipate these uncertainties and account for them in the creation of your financial plan. As the economy changes, we continue to monitor your plan and adjust your positions to give you the highest probability of long-term success. If you are interested in learning more about how we care for our clients in all economic climates, please schedule a complimentary consultation call with us today. We’d be delighted to share our practice with you.
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[i] https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/prospect-theory/
[ii] https://www.jstor.org/stable/pdf/43197079.pdf?seq=1