– Unprecedented policy measures during COVID-19 will limit the depth of a recession
– The worst is likely behind us for markets, but yet to come for the economy
– Unemployment likely to go up sharply, but come back down much faster than the ’08 recession
– A good financial plan is designed to weather market storms, stick to it
Have we seen the bottom?
We think so, but the economy will likely suffer through a recession in the coming quarters. It would be very unusual for equities to bottom before the recession may have even started. However, there are several reasons that this time could be different, including the incredibly sudden onset of the crisis, the dramatic response by the market, unprecedented policy measures and the strength of the economy heading into the crisis. We believe the policy measures during COVID-19 paired with the strength of economy prior to the COVID-19 outbreak, grant stocks some ability to “look through” what is likely to be a fairly short recession. And that the lows established in the middle of the month did not account for such a dramatic policy response.
Unprecedented Policy Response
The market’s vigorous selloff sparked an unprecedented response from policymakers both on the fiscal and monetary side. The Federal reserve wasted no time in slashing rates to near-zero and then quickly followed up with quantitative easing that included the purchasing of corporate bonds. These actions have flooded the market with liquidity, which will hopefully allow credit to keep flowing even as economic data deteriorates. On the fiscal side, Congress passed a record-setting $2 trillion dollar stimulus package, which is bigger than the 2008 bank bailout and 2009 recovery act combined.
In our opinion, the package did a good job at addressing the most important issue facing the economy: the prospect of a soaring unemployment rate. Furloughed employees will receive and extra $600 a week from the federal government on top of any unemployment benefits from the state. This will go a long way to keep people making rent, mortgage and/or credit card payments, which should prevent widespread credit issues that would lead to a much deeper recession. In an attempt to contain the rise in unemployment, the legislation included an “employee retention” tax credit that is estimated to provide $50 billion to opting to retain employees and cover 50% of their paychecks. Additionally, most Americans will be receiving a check for $1200, plus $500 per child.
The checks will serve to bolster consumption, but maybe not as quickly as policymakers hope. Many consumers may save their money waiting out the storm. However, in that case, there would likely be pent up demand that would be released upon a return to normality.
Where do we go from here?
The economy is likely to fall into recession. But it is important to remember not every recession is the same as the 2008 crisis. This one is likely to be much shorter, although the unemployment rate is probably going to reach higher levels. New unemployment claims, which come out weekly, came in at over 3.2 million on March 26, 2020. That shattered the previous record of 695,000 and was about double what economists were expecting. The staggering number is because the jobs hardest hit are in restaurants, travel and leisure industries. Which employ a lot of people. Unfortunately, the unemployment rate will likely continue to rise while the social distancing measures are in place. And remain elevated for some time after.
There is somewhat of a silver lining in that these industries can hire and train new workers very quickly. Which means the persistent high levels of unemployment we saw following the 2008 crisis are unlikely to be repeated. The market could stay choppy and especially sensitive to policy. But we think the worst is behind us from a market perspective. Additionally, we think the policy measures during COVID-19 will go a long way to preserve the underlying strength of the economy that we saw prior to the crisis. We think this will likely lead to a relatively fast recovery for the economy and your portfolio.
What should I do?
Volatile stock markets are always stress inducing, but we urge clients not to give into panic. Recessions have happened before, and they will happen again; financial plans are designed to weather these ebbs and flows of the markets. Stick to your plan and if you have any questions, we are always here to help.
To learn more about the writer of this article, Cormac Murphy, CFA, visit: https://adamswealth.stealthmedia.com/team/cormac-murphy/
Or connect with him on LinkedIn: https://www.linkedin.com/in/cormac-murphy-cfa-33897914/.
Adams Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.