The possible economic fallout of COVID-19 has already been compared to that of the Financial Crisis of 2008. This time, however, we believe it could be worse. That’s because during the financial crisis, it was really just the financial industry that was affected.
It started with people thinking that subprime mortgages were going to cause the real estate industry, and maybe the financial industry, some pain. Then, we realized that so many financial institutions had irrevocably tied themselves together with insurance contracts known as credit default swaps. As a result, the subprime mortgage crisis affected the financial industry more than the overall economy.
In contrast, what we’re experiencing in the new coronavirus economy is a true economic stoppage that’s impacting most sectors of our economy. At the end of the day, our economy won’t be able to start moving forward until we find a cure for the coronavirus, or we find a vaccine and are able to vaccinate everyone. Until that happens, the economic stoppage will likely continue.
During times like this, it’s important not to sit on your hands out of fear or complacency. Right now, you need to be the one to take action. A good first step is to make sure the financial advisor you’re working with is qualified to help you through this unprecedented event and truly has your best interests in mind.
If you have any doubts, then please take advantage of the opportunity to schedule a complimentary 15-minute phone call with an Income Specialist from The Retirement Income Store®.
The New Coronavirus Economy and How to Help Protect Your Retirement Savings
If you heeded the advice of our Income Specialists and already started investing for income instead of growth, odds are that your portfolio has probably seen less of a negative impact than you would have had if you were still invested primarily in common stocks or stock mutual funds.
One reason I believe that Investing for Income is a viable solution for today’s retirees and near-retirees is because often, when you use fixed-income investments, you are investing by contract.
For example, investing in individual bonds is one way you can invest by contract. When you buy a bond, the issuer of that bond guarantees you a certain rate of interest for the life of the bond, and, when the bond matures, they guarantee that they will pay you back the par value, assuming there are no defaults.
In my opinion, that is much easier to do than trying to predict the fickle whims of Wall Street and the stock market—where there could be little to no risk of corporate bankruptcy, and the stock could still drop by a big percentage.
What’s more, the active management approach we take to managing our clients’ fixed-income investments makes it possible for our account managers to try to continually minimize that risk, while also taking advantage of any potential new opportunities that might emerge.
Why Stock Market Volatility Has Hit Historic Levels Since the Coronavirus Started
What we’re experiencing today as a result of the coronavirus is an unprecedented economic stoppage that’s impacting most sectors of our economy. Because it’s unprecedented, it is very difficult for anyone to forecast or predict.
The bottom line is that we’re in uncharted waters in many ways with the coronavirus pandemic. We’ve never had to deal with anything quite like this before from a social, medical, or economic standpoint. That’s largely why stock market volatility has hit historic levels since all this started.
Remember, the stock market is driven by emotion and is largely forward-looking. Looking ahead in this situation, investors will be bouncing back and forth between extreme fear and occasionally cautious optimism. They just really don’t know what to expect because no one does. That’s why the government’s relief plan is so expansive, and why the emergency measures recently taken by the Federal Reserve are also largely unique.
What’s the Impact on the Economy Right Now?
The United States is truly the land of the free and the home of the brave. However, that freedom we enjoy is also what has allowed us, in a short period of time, to have more coronavirus cases here than in China, whose population is much bigger than ours.
Our freedom is a big reason why the social distancing measures meant to slow the spread of the virus have been really difficult to enforce. Fortunately, that’s changing, especially now that the White House has announced a 30-day extension of its coronavirus guidelines.
People are now encouraged to avoid crowds and stay at home as much as possible through April 30th, and who knows how much longer after that. Naturally, that means the US economy, or at least most of it, will continue to remain on hold for that much longer. That also goes for much of the global economy as well.
Unless we find a vaccine or have martial law to force us to stay home and not spread the virus, this very well might continue for some time. Again, that’s what makes it so hard to predict and model the coronavirus’ economic impact.
Will Congress’s Plan Stimulate the Economy by Giving People More Money To Spend?
As you know, the coronavirus stimulus package includes one-time checks for millions of workers below a certain income level. Most adults will get $1,200 while those with children will receive another $500.
For workers who have already lost their jobs because of the coronavirus pandemic, that money will probably be used to pay essential bills. However, even for those fortunate enough to still be working, the question becomes how likely are they to put that money towards something that helps offset the impact of the economic shutdown. It’s probably not very likely.
Congress’ plan has a fatal flaw. Yes, all the textbooks say that if you flood the market with cheap money, it’ll stimulate the economy by giving people more money to spend. However, those textbooks don’t address the fact that when people are scared about losing their jobs, they might not be so likely to go out and spend that money.
Instead they’re more likely to hold onto it because they’re worried things might get worse before they get better. Therefore, jobs will probably not be protected, and people will continue to feel insecure. It’s a vicious cycle.
The New York Real Estate Market
Jeff Small, the National Brand Ambassador for The Retirement Income Store®, recently joined David Scranton on The Income Generation Show. Jeff shared his thoughts about what’s happening in the housing market in New York.
Jeff mentioned that there currently seems to be a big vacuum of demand, with a lot of properties having been pulled off the market because of a lack of buyers. In today’s coronavirus real estate market, many have made projections that some of the major metropolitan areas could experience a drop of 25% to 30% in market value from present values. That’s probably going to be a systemic event.
It always starts with the top end of the real estate market, and then trickles down through the rest of the market. So, when you have this kind of destruction in demand for various goods and services, including real estate, what ends up happening is that prices will drop.
That’s just the law of economics. When there’s a lack of buyers, there tend to be more sellers, and as a result, prices drop. Unfortunately, what is happening right now with the New York real estate market will most likely also happen in other sectors of the economy, including the stock market.
Current Opportunities for Investors
As we mentioned earlier, the unprecedented nature of the economic stoppage currently impacting our economy and financial markets makes it difficult to forecast how this will all play out. Perhaps the closest thing our country has experienced to this that might be comparable is The Great Depression. Some analysts have forecast that unemployment rates could possibly go as high as what we experienced during The Great Depression.
Goldman Sachs recently forecast a possible 24% decrease in GDP in the second quarter of 2020, and Morgan Stanley forecast an even bigger drop. The bottom line is that many economists believe that things could get worse before they get better.
That means that if you are retired, or close to retirement, and have not sufficiently reduced your exposure to stock market risk, you still have an opportunity to help protect your money. Those who are further away from retirement might also have the opportunity to capitalize on undervalued stocks once the market bottoms.