On the Verge of Economic Recovery?
/by Shelley Murasko, originally posted 11/01/2020
By all indications, 2020 was supposed to be a bounty year.
In February, the unemployment rate dropped to its lowest mark in 50 years.1 At 3.5%, it was a sign that businesses were doing well.
We were in the midst of the longest-running bull market, and it was showing no signs of ending. In fact, all three major stock indexes—the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Index—were on the rise in mid-January.2
On top of that, the American economy was on the upswing after posting a 5.8% jump in retail sales in 2019. According to the Department of Commerce, this was an improvement over the past 30 years’ average.
The Pandemic Effect
Three months later, the world had turned upside down. The coronavirus continued to spread, prompting a pandemic and a subsequent shutdown that swept the globe.
With American businesses closed, consumer spending halted and the economy plummeted as the country recorded one of its sharpest downturns since the Great Depression.1
Unemployment skyrocketed, reaching a historic high of 14.7%.3 By May, more than 20.5 million Americans were out of work.
The previously soaring stock market suffered deep losses, forcing the end of the 11-year bull market. The S&P 500 experienced one of the most extreme swings, hitting a record high on Feb. 19, then nosediving by 35% for a new low on March 23.4
After months of dealing with the challenges brought on by COVID-19, you’re probably wondering: When will things return to normal or, at least, something closer to it?
Growing Optimism Amid the Current Crisis
It may be sooner than you think.
Despite the recent turmoil, the economy is already showing signs of recovery led by a strong turnaround in the technology sector.
Big tech companies like Apple, Microsoft and Google parent Alphabet are recording big gains. Apple, in particular, has had a banner year. The largest company in the U.S., Apple saw an increase of 111% and is now worth $2 trillion.
A dozen companies in the NASDAQ 100 also saw share prices more than double since the market low.6 Here are a few of the top performers:
· PayPal – stock price jumped from $85.26 to $198.18
· Tesla – recorded an astounding 360% recovery
· eBay – up markedly to 118%
These strong performances have propelled a rapid market rally. In just five months, the S&P 500 went from its lowest point in March to setting a new record high on Aug. 18.
Since then, stocks have rebounded by more than 50%. In early October, the Dow advanced 3.3% to record its best weekly gain since Aug. 7. Following suit, the S&P 500 moved up 3.8% and the Nasdaq Composite surged 4.6% for their best weekly finish since July 2.5
Small-cap companies are also performing well, fueled by the possibility of additional government aid.7
Another positive sign is that second quarter corporate profits were better than expected for some major retailers. Walmart and Home Depot, for example, both exceeded the earnings expectations of Wall Street.1
A continual drop in unemployment has also generated national optimism. In September, the jobless rate dipped to 7.9%. Today, about half the jobs lost as a result of the shutdown have been recovered.3 The reopening of businesses has played a key role in this improvement.
“We remain hopeful that many of those job losses could be reversed quickly once the virus is brought under control—after all, the surge in the number of unemployed was due to temporary, rather than permanent, layoffs,” K.C. Mathews, executive vice president and chief executive officer at UMB Bank, said in a Yahoo! Finance article.8
As more businesses reopen, it’s likely the unemployment numbers will continue to fall. In fact, workers seeking employment may do well to apply at e-commerce and direct-to-consumer companies. The reason? These businesses have performed exceedingly well despite the economic downturn.
“As an advertising agency, Narrative has seen a revenue bounce for our e-commerce and direct-to-consumer clients that now exceed pre-COVID levels,” said Ken Chen, co-founder and managing partner at Narrative.8
More positive news is coming from the real estate sector. According to a USA today article, the housing market is showing signs of growth with new home construction figures up by 22.6% in July.1
Progress on a COVID-19 vaccine has also spurred a significant amount of optimism. The hope that we will have a viable serum soon seems to have pushed the markets toward more positive results.
Former Federal Reserve Chair Ben Bernanke shares this optimistic attitude. “The U.S. economy will recover and within a few years will show only modest marks of this experience,” he said in a Brookings Institute online event, Reuters reported.8
Potential for a Quick Economic Turnaround
No one knows when the coronavirus crisis will end. Right now we’re seeing signs of economic improvement, but a full recovery may not occur until an effective vaccine is developed. Once that happens, though, the economy could see a quick turnaround.
“If we solve the virus, we’ll quickly get our groove back,” Mark Zandi, the chief economist of Moody’s Analytics, told Kiplinger. “There will be pent-up demand, and interest rates will be low. Assuming the finance system is not taken out, we’ll see a period of good strong growth in the second half of 2021 going into 2022.”
The Best Strategy for Investing During a Crisis
As the wait for an approved vaccine continues, how should you be managing your investments? Should you stay in the market or get out until the crisis ends?
David Swensen, CIO at Yale University, believes that staying in is the best approach.
“When you sell in the midst of a crisis, you can put yourself in a position where your portfolio will never recover,” he said during a recent NPR interview.10
As an illustration of this, investors who “sat it out” in the spring due to the market turbulence missed out on substantial gains. According to S&P Dow Jones Indices, an investor who put $10,000 in an S&P 500 index fund on Dec. 31, 2019, would have seen it increase to $10,594.57 with dividends by Aug. 17, 2020.1
Investment guru Warren Buffett, who is confident the U.S. economy will bounce back from the current crisis9, is also a proponent of this investment strategy. He believes your smartest move is to stay in the market, even when it’s doing poorly.
“Nothing can basically stop America,” said Buffett during Berkshire Hathaway's online shareholders meeting earlier this year. “We haven’t really faced anything that quite resembles this problem, but we faced tougher problems. The American miracle, the American magic has always prevailed, and it will do so again.”
If you’d like to discuss your current investment strategy, I’d love to talk with you. Feel free to reach out to me at shelley@wealthrisecfp.com.
Sources:
1 - Menton, Jessica. (Aug. 18, 2020). “The stock market closes at a record high, defying the COVID-fueled recession battering the US economy.” USA Today. Retrieved from https://www.usatoday.com/story/money/2020/08/18/s-p-500-hit-record-optimism-economic-recovery/3390056001/.
2 - Zacks Equity Research. (Jan. 17, 2020). “Stock Market News for Jan 17, 2020.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/stock-market-news-jan-17-143302943.html
3 - Rushe, Dominic and Sainato, Michael. (Oct. 2, 2020). “US unemployment rate falls to 7.9% in last look at jobs market before elections.” The Guardian. Retrieved from https://www.theguardian.com/business/2020/oct/02/us-unemployment-numbers-elections-economy-jobs.
4 - Belvedere, Matthew J. (Apr. 16, 2020). “The March low may have been the market bottom, says CEO of the world’s largest money manager.” CNBC.com. Retrieved from https://www.cnbc.com/2020/04/16/larry-fink-coronavirus-low-last-month-may-have-been-the-market-bottom.html.
5 – Zachs Equity Research. (Oct. 12, 2020). “Stock Market News for Oct 12, 2020.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/stock-market-news-oct-12-135501433.html.
6 - Canellis, David. (Aug. 21, 2020). “Apple worth $1 trillion more since COVID-19 crashed the NASDAQ 100.” The Next Web / Hard Fork. Retrieved from https://thenextweb.com/hardfork/2020/08/21/apple-tesla-stock-covid-bounce-nasdaq-market-index-crash-market-values/.
7 - Wang, Lu and Ferro, Jonathan. (Oct. 9, 2020). “Never Mind the Narratives: ‘This Market Wants to Go Higher’.” Yahoo Finance. Retrieved from https://finance.yahoo.com/news/never-mind-narratives-market-wants-200732205.html.
8 – Olya, Gabrielle. (Oct. 9, 2020). “25 Experts’ Predictions on When We Will Bounce Back From COVID-19.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/17-experts-predictions-bounce-back-183000197.html.
9 – Whiteman, Doug. (Oct. 7, 2020). “Warren Buffett says this is the way you get through COVID financially.” Yahoo! News. Retrieved from https://news.yahoo.com/warren-buffett-says-covid-19-151000444.html.
10 – NPR Life Kit Podcast. (Aug. 21, 2020). “How to Invest – Even During a Pandemic.” NPR. Retrieved from https://www.npr.org/transcripts/904280484.
Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.
