By Morgan Christen
CFA, CFP, CDFA, MBA, CEO and CIO
This lockdown has turned us into connoisseurs of all types of shows and documentaries. I have learned about a Tiger King, a cult in Oregon, and heard a few death row confessions. When I want a quick escape from the news and the incessant bad reports thrown at me, I tend to watch shows about cars (much to my wife’s chagrin).
Whether they are reviewing them or fixing them, watching someone find an old car in a barn and get it running fascinates me. Taking a vehicle with nests in it, years of dirt and dust, and getting it running requires a process to get the car cranking over. That process begins with checking for spark, cleaning the carburetor, change oil and filter, fresh gas and some pre-lubing.
Turn the key and let us see if she starts.
Many economists are talking about our economy in terms of restarting an old engine, and I would agree. Much like these cars, the economy will take a bit to get started.
Will people go back to stores and restaurants immediately? Will consumers spend? Will they be the spark? Will companies start ramping up travel?
We know the Fed is providing a tremendous amount of lube to the economy, which should help once the engine starts to turn. However, once it starts, we are not sure if there is the capacity to put the hammer down. This economy may be a 1972 Volkswagen bug rather than my four speed, dual quad, posi-traction 409.
There has been a lot of talk about the economy coming back in a U-, V-, W- or L-shaped recovery. The outcome of this alphabet soup could vary vastly.
The ideal outcome is the “V” shape, showing a strong recovery that will not only make the numbers look good for 2021, but also a better 2020.
The worst outcome being the “L” shaped recovery, much like Japan saw during their lost decade.
We would suggest this recovery will be more like a Nike “swoosh” recovery. Much like the “U” shape but a longer trough.
As we start to phase in this economy, it will be interesting to see who goes back to work and who shows up at restaurants, bars, and gyms.
A “V” shaped recovery assumes that people start to flood into restaurants and other venues, which may not be the case. It may take people time before they venture back to restaurants, some polls show that 81% of Americans want to wait until it is “safe.”
The swoosh is more appropriate in our view, as it will first take time to get the motor running and then take a little more time before we can put the pedal to the metal.
The economy, and our lives, will never go back to the prior “normal.” Employees seem to be productive not working in an office. People will start to save a bit more, as they realized they did not have enough in the bank. We are walking more, does that mean traditional gyms will be a thing of the past? A new normal is fine. We will learn better and different ways to do things, many of which will lead to a much higher quality of life.
We are starting to see changes in societal and economic values, and those appear to be positive.
The numbers look horrible, but there are changes to who are deemed unemployed.
The federal government is letting states expand who can get unemployment benefits right now.
People who have been furloughed aka when your company hits pause on your job and your paycheck, until it can (hopefully) hire you back later.
People who work for companies that have temporarily stopped operations because of the virus.
People who are quarantined and expect to go back to work afterward. You may have to show proof that you were mandated to quarantine by a health professional.
People who leave their job because they are at risk of being infected at work.
And people who leave work because they are infected or taking care of an infected family member.
Freelancers, people who are self-employed, and gig workers – like Uber drivers – can also now apply for unemployment benefits.
If you have multiple jobs and lose one, some states allow you to file.
In the meantime, the market is taking a breather from the run-up of the last couple of weeks. All of that is rational and appreciated. Investors were pricing a V-shaped recovery, but with volatility in oil and confusing messages, caution has prevailed.
The top sectors in the S&P 500 are Tech and Health Care, both areas that have done well over the last couple of weeks. Financials, consumer discretionary, industrials, utilities, real estate, energy and materials are all impacted by the shutdown. We anticipate it will be some time before we receive clarity in those sectors.
Real estate will see profound changes as business decided to shrink their office space needs as they move to telecommuting. Energy is in flux as we have a glut of oil and virtually no demand. When will consumers start to buy discretionary items? That may take a back seat to savings and essentials.
In the end, we are like ants. You see an ant line and you stomp on it. There is mass chaos at first, but then we all get back in line and continue like nothing happened. This happened after 9/11 and the Spanish Flu of 1918 and will happen after COVID-19.
As we have mentioned before, the stock market tends to make moves based on trends six months out. There is still not much clarity as we move to phase in the economy. As things become clearer, the markets will respond. If we bump around in short term, we are fine with that.
We are looking at the long term and it is our belief those who stayed the course, those who added to stocks and those who rebalanced, will be rewarded in the long term. Life will be different, but the turning point could begin today, May 1st.
As always, please call us with any questions. Our advisors are always available to discuss your savings and investment goals for today and the future.