Q2 2020 economic commentary: What all the mixed messages can mean for your investments
The second quarter was one of contrasts. As the pandemic spread, businesses closed, and unemployment in the United States rose to a 50-year high. Markets initially reacted with a big drop. Then, almost as quickly, they bounced back.
So how can there be such a disconnect between what we’re seeing with the economy and what’s going on in the markets—Main Street vs. Wall Street? Signs point to continued economic downturn and some uncertainty about markets.
“After more than a decade of the market moving upward, we've become conditioned to experiencing higher highs. Now, there's been a shock to the system, and it can be hard for people to adjust to the uncertainty of it all. A lot of people today are grappling with what to do next,” says Heather Winston, CFP, assistant director of financial advice and planning at Principal®.
Now, there's been a shock to the system, and it can be hard for people to adjust to the uncertainty of it all.”
Heather Winston, CFP, assistant director of financial advice and planning
Even though this market event might feel different because it’s a pandemic, there are still opportunities to make or lose money, Winston says, adding that it’s a time to go back to the basics and evaluate needs, wants, and goals.
So, what makes this downturn different?
Recessions are usually caused by factors like inflation, defaults, rising interest rates, or some combination of these. But this time a virus is the key culprit, not just underlying economic problems.
Since the root cause is unique, the downturn and recovery will probably look different, too.
Other signs that things aren’t like past recessions:
Official action to help the economy re-start immediately.
As the coronavirus spread, governments set up massive relief packages right away. Central banks globally have put $6 trillion into markets.1
Even though many households are struggling, May and June surveys showed that overall household confidence was higher than during the financial crisis a decade ago, potentially lifted by government stimulus checks.2 (Though, these numbers fell again in July, likely due to a widespread resurgence of the coronavirus.3) Personal income rose 10.5% in April—a far cry from the 5.9% decline that was expected. Meanwhile, household savings rose to 33%.4
Signs of improvement in the labor market.
While U.S. unemployment remains high, the labor market showed some signs of improvement, gaining 7.5 million jobs in May and June as states started reopening.5
Investors (like you) are generally optimistic.
There were some jitters in early March as the coronavirus spread to Italy, U.S., and other western countries, but most consumers we surveyed left their investments alone in hopes of giving them time to recover.6
Though markets are chugging along, there are also signs that market volatility could go on for a while. Continued high levels of unemployment and an increasing number of company bankruptcies point to longer-term economic impact. The longer the pandemic drags on, the more impact on the economy, and the more dependence on unemployment checks and government stimulus to keep things running.
“The direction of the economy is a generally positive, albeit bumpy, one,” says Seema Shah, chief strategist for Principal Global Investors. “Overall, activity appears to be slowly improving, but be prepared for post-COVID-19 healing to extend over a prolonged period of time with increased bouts of volatility.”
Be prepared for post-COVID-19 healing to extend over a prolonged period of time with increased bouts of volatility.”
Seema Shah, chief strategist for Principal Global Investors
Here’s what we do expect:
There’s a lot to be uncertain about. In addition to the pandemic, the upcoming U.S. presidential election and increasing trade tensions could mean more volatility in the markets and in your investment portfolio.
The market rally is likely to slow.
As pent-up demand from consumers is satiated the market rally is likely to slow. Consumers and businesses still need to feel confident the pandemic has been successfully contained before they return to normal behavior. Markets aren’t likely to rebound like they did in April but also aren’t likely to drop the way they did in early March.
A global recovery.
Despite the current pandemic which has hit certain industries like hospitality or airlines especially hard, the economy shows signs of heading in a positive direction. A recovery appears underway, buoyed by a gradual wave of re-openings plus government stimulus and various actions by central banks.
Less government support?
Some are worried about how much longer governments can keep stimulus action up. While it’s helped consumer sentiment, public debt is now surpassing heights reached during the global financial crisis and governments are becoming more uncomfortable extending various support. A reduction or stop in government action could translate into more volatility in the markets and a change in consumer sentiment.
Low interest rates.
A slower recovery means there’s lower risk of inflation, so central banks can keep interest rates extremely low for a while longer. Low rates on everything from car loans to mortgages to personal loans make borrowing more attractive. And as long as inflation remains at bay, you may be able to make the money you have saved go further and last longer.
What you can do
Review your current financial picture.
- Get back to the basics. Look at what you’re saving and spending and where you’re invested. Do all those things still make sense within your financial plan?
- Evaluate your risk. It’s understandable to want to pull out of your investments and sit on the sidelines when markets are shaky, especially now when there’s a historic health crisis and an upcoming presidential election. But an important part of investing is sticking to your long-term plan. What you may need to consider changing is your risk tolerance, asset allocation (how your investments are divided among various asset classes), and savings rate. Take our risk tolerance quiz (PDF) and see if your mix of investments (aka your portfolio) is aligned to it.
Revise what no longer makes sense.
- Adjust your budget. As your needs change over the course of the pandemic, so might where and how you spend money. For example, maybe you’re not spending nearly as much on gas, but entertainment costs like subscription services and the kids’ video games are taking up a bigger chunk of your budget. Or, if you’re not driving much, maybe you sell one of the family cars or trade yours in for an older model with a lower monthly payment.
- Consider rebalancing your investments. If your risk tolerance or time horizon (like your retirement date) changed you may need to rebalance your portfolio.
Refocus your energy.
You may need to shift financial priorities based on current circumstances. A couple ideas:
- Shore up savings. Uncertainty is a strong reminder to bolster emergency savings. Having those savings can ease the financial hit from a sudden job losses or health emergency.
- Take advantage of low interest rates. With interest rates at historic lows, borrowing has become more attractive. It may make sense to refinance existing debt—credit card, mortgage, car loan—at a lower rate. You can check bankrate.com for current rates.
- Don’t be afraid to ask for help. When the markets get bumpy, you can call your financial professional with questions. Don’t have one? Check with your HR department to see if there’s someone you can work with through your employer’s retirement savings plan. Or, we can help you find one.
- Look into a robo-advisor (digital advisor), which can help take the emotion out of investing by automatically rebalancing your portfolio.
- Still have concerns about volatility? Get answers to common questions.
1 Global Asset Allocation Viewpoints Quarterly Summary, Principal Global Investors, June 2020
2 Economic Insights, May 2020: A push to reopen, Principal Global Investors
4 Personal Income and Outlays: April 2020, Bureau of Economic Analysis
5 Bureau of Labor Statistics’ June Employment Situation
6 Principal Financial Group, Consumer Pulse Survey, March 2020
The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.
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