As little as six months ago, our financial futures looked bright and we could actually look forward to the arrival of the quarterly 401K statement. Suddenly, we are now in recession, according to the National Bureau of Economic Research. The NBER is the official arbiter of recessions and expansions. The prior expansion, which began in 2009, officially peaked in February, having lasted a record 128 months.
Past recessions have lasted as briefly as 6-8 months, including the 1957-58 recession that coincided with the Asian flu pandemic. While the economy is much different today, the recovery from this short but steep recession was robust. Given surprisingly strong data in May and June and continued affirmation of a strong jobs report issued as recently as today, April may mark the bottom of the economic cycle. While U.S. stocks recently had their best quarter in 22 years, let us not forget that the economic and financial effects of the virus continue to unfold.
Consumer spending, after falling at unprecedented levels in March and April, rebounded by a record 8.2% in May. Pent-up demand, stimulus checks, generous unemployment benefits, a rise in employment, and reopened businesses supported sales.
Consumer confidence is also improving per the Conference Board’s Consumer Confidence Index. It remains well below pre-coronavirus levels, but rising confidence and re-openings are supportive of economic activity.
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 in May. 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 that 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 bull market seems to be coexisting with the rise in cases. Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds.
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 I 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.
- Money at the end of your month. Saving for an emergency cannot be overestimated. Three to six months is optimal. But there is an added benefit–financial peace of mind.
Debt brings stress, I’ve seen it over and over and experienced it myself in the past. It’s not that I would counsel against a mortgage for a home or a reasonable loan for a car. But the accumulation of wants (not needs) with debt doesn’t bring contentment. A financial cushion eliminates one of life’s worries.
- Wants vs. needs. Many of us have learned to do without certain things during the quarantine. Whether we wanted to or not, we were forced to cut back on certain items.
Ask yourself this question, “As businesses reopen, are there things I can do without? Can I continue to cutback and still maintain my lifestyle?” It’s not a cold turkey approach, i.e., no more eating out, sporting events, travel, or theater. But can we reduce expenditures on some items without sacrificing our overall lifestyle?
- 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. The major indexes have erased much of their losses. Yet, how did you fare emotionally when stocks took a beating? Now is the time to reevaluate your tolerance for risk.
- Expecting the unexpected. Fluctuations in the financial markets are inevitable, but I recognize that the onset of a steep decline may be unnerving. A portfolio of stocks has historically had an upside bias. Combined with a healthy mix of fixed income investments to help cushion the decline provides a balanced portfolio to invest for the long term. There are many investment alternatives to help you obtain the appropriate mix of these investment allocations suited to your situation and investment goals.
Be proactive, not reactive
The steps above are a broad overview and individual circumstances may vary. Taking inventory is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a much better position than you realized.
I 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 I’m here for.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.