Over the past couple of weeks, we’ve seen hopeful developments in the battle against the coronavirus. Although we’ve reached one million coronavirus cases across the country, the good news is that we seem to be flattening the curve in terms of hospitalizations and new COVID-19 cases.
While there may be some light on the horizon, we’re not there yet. If you’re still worried about the coronavirus’ economic impact on your retirement plan, now is the time to act.
Rising Unemployment and The Stock Market
There has been talk recently about the apparent disconnect between economic reality and stock market performance. This might lead some to wonder if there is a relationship between unemployment and the stock market.
Most would think that stocks would be impacted by high unemployment numbers, but that doesn’t seem to be case so far. The reality is that more than 30 million Americans are out of a job right now, and so far, the high unemployment rate hasn’t seemed to affect the stock market as much as you might think. With unemployment still rising week after week, economists say states could soon run out of money and need federal loans.
Dow Jones vs Unemployment Rate
Amid all this bad news for the economy, the stock market saw a spike. After being down nearly 30% at one point, the market has recovered roughly two thirds of its losses. Naturally that might make some people ask, is the stock market an indicator of economic health?
I’ll let you decide. Right now, the entire travel industry is at a standstill. Oil prices have taken a historic drop, and both retail sales and U.S. factory output have reported record declines. To me, it doesn’t sound like the stock market is grounded in economic reality.
Some leading economists are predicting that the unemployment rate could ultimately climb as high as 30%. Now consider that at the height of the Great Recession, unemployment peaked at about 10%. Also remember that in conjunction with the Financial Crisis and Great Recession, the stock market underwent a correction of nearly 60%.
So, although we may continue to see spikes in response to hopeful headlines or moves by the Fed, I believe the economic realities of this crisis will continue to pull the market more decisively downward. This cycle is called backfilling, and it’s a typical pattern for a market on the verge of a major correction.
As I’ve discussed before, the stock market’s ability to temporarily shrug off these hard realities and pare some losses may continue for a while. This gives investors in or nearing retirement the potential opportunity to reduce their market exposure before the next major correction really takes hold.
What Happens to the Economy If We Go Back to Work Too Soon?
Weeks of strict social distancing across the country has helped flatten the curve for hospitalizations and new cases. As a result, lawmakers have become increasingly optimistic about reopening the economy.
In addition, a new antiviral treatment by drug-maker Gilead is reportedly boosting COVID-19 recovery times, and prospects for a vaccine have been improving. Due to some of these hopeful signs, the stock market saw a slight jump, and President Trump is moving forward with plans to reopen the country and the economy.
My concern with going back so soon is that it could cause us to face a second wave that could be worse than the first. I believe it’s similar to when we come down with a bad cold or flu. If we try to do too much as soon as we start to feel better, that cold or flu can come back with a vengeance. That’s my concern here.
The Disconnect Between the Market and the Economy
The last time we had so many Americans out of work was during the Great Depression. On April 16th, the Conference Board reported that its index of leading economic indicators, the LEI, fell by nearly 7% – the biggest decline in its 60-year history.
Bloomberg recently reported that the U.S economy shrank at a 4.8% annualized pace in the first quarter of 2020—with consumer spending declining at the fastest pace since 1980. All that came from an economic slowdown that occurred in only the last few weeks of the quarter. We can only imagine how bad second quarter numbers will be.
So, why has the stock market been going up?
After a few hopeful developments in the coronavirus crisis over the last couple of weeks, the stock market saw a spike. Recently, it has recovered roughly two thirds of its losses since the pandemic began. This has even prompted some bullish forecasters to proclaim the worst is over for Wall Street.
Well, with all due respect to those forecasters, their prediction makes no sense to me. Despite any hopeful signs, I believe the hard economic data suggests this stock market will go down a lot further in order to align with economic reality.
Possible Reason for the Stock Market’s Recent Rise
For some time now, I’ve been saying that I wouldn’t be surprised if the Fed were to step in and start buying stocks to support the market. Yesterday, Mohamed El-Erian echoed that concern when he was explaining possible reasons for the stock market’s recent run. He also added that the Fed buying stocks could lead to a ‘Zombie’ market.
To me, it seems like stock market participants are assuming that the Fed will expand their intervention efforts and will start buying stocks. But, what if it doesn’t? Investors better be ready, or a lot of wealth could be destroyed in the next market drop.
Is It Too Soon to Re-Open the Economy?
recently with people demanding that we reopen the economy so they can go back to work. While the frustration is understandable, many health experts agree these kinds of gatherings could undermine the great progress we’ve made so far in flattening the infection curve.
That’s my concern here with the reopening of the economy. My concern is that opening too soon could cause a second wave with the potential to be worse than the first. Naturally, that would only prolong the need for social distancing and the resulting economic pain.
Although we may finally be seeing some light at the end of the coronavirus tunnel, fully illuminating that light won’t be as easy as flipping a switch.
How Do You Create the Environment for A Revived Economy?
Returning to normal will be a gradual and probably frustrating process. Even then, it will be a new normal, with some of the changes now remaining permanent. Some businesses won’t come back, and some entire industries will continue to struggle.
The disposable income people had a few months ago to spend on dinners, vacations, and gifts won’t be there any longer as they look for new jobs and try to stretch every penny.
The psychological wounds this crisis is inflicting will also take a long time to heal, and that, too, will slow economic recovery.
The point is, while we’re all eager to pick up and get on with our lives, we need to prepare ourselves now for the reality that it probably won’t be that simple. In the process of preparing psychologically, we should also be prepared from a practical standpoint as much as possible.
For Americans in or near retirement, that means making sure your retirement plan is modernized for the new corona-economy.