Yes, There’s Reason For Optimism On The Economy. Just Don’t Overdo It

Chief Investment Officer at Cetera Financial Group (@CeteraFinancial). Find more insights at Cetera Investment Management (@CeteraIM)

Any forecast at the start of 2020 could not have predicted the unthinkable: that a global pandemic would threaten millions of lives and livelihoods and quickly lead to a staggering economic decline. In our own outlook early in the new year, I noted favorable trends ahead, such as continued but slower growth in GDP, a strong job market, positive consumer spending and confidence, and solid stock market performance. That seems like a different time now. The only things that still hold true from six months ago are the historically low interest rates and the looming election, though the economics and politics of the pandemic have intensified the discourse of this campaign season.

Now, months into the Covid-19 crisis, there are ongoing concerns in the face of unprecedented unemployment, the closing and lurching restart of so many businesses, limited travel and seasonal activities, and uncertainty about when things might normalize. But the economy is reopening in fits and starts, and there are signs that our worst-case scenarios will not be realized.

There are reasons for optimism on the economy. But too much optimism would be foolhardy in such a challenging and precarious year.

By all traditional measures, the U.S. is in a recession, and the country’s economic risk indicators are nearly universally negative. GDP fell 5% in the first quarter and, by some estimates, plummeted roughly 35% in the second quarter. Consumer confidence tanked amid Covid-19 shutdowns, dropping from a 20-year high of 132.6 in February to 85.7 in April, according to the Conference Board. While the index rebounded to 98.1 in June, new state restrictions amid a resurgence in the virus were expected to dampen consumer sentiments. The sales of durable goods, like cars, are rebounding too, but even people with expendable income are spending cautiously. Personal savings skyrocketed in April to 33%, up from 12.7% in March. The other key economic indicator, unemployment, has improved from a few months ago, dropping to 11.1% in mid-July from a high of nearly 15% in April, with job growth exceeding expectations. The U.S. lost more than 20 million jobs as social distancing measures kicked in, and while jobless claims have leveled off, they are still surpassing 1 million per week, according to the latest Labor Department statistics.

Amid sure signs of a recovery, many investors and analysts believe the rebound will be as fast and steep as the downturn amid Covid-19. That may be too optimistic. Recovery will likely not be as sharp and fast as the collapse of the past few months, but instead slower and more U-shaped given such unpredictability.

While every recession feels unique to the era, this time really is different. The longest economic expansion in history, which stopped abruptly in March as the novel coronavirus elevated to pandemic levels, may in fact be followed by the shortest recession ever. Since the 1950s, recessions typically have lasted less than a year. If Covid-19 cases stabilize, and treatments and a vaccine are rapidly developed, the U.S. could quickly pull out of recession.

That’s the best-case scenario. There are many reasons for caution, as the turn on a number of factors could cause a sudden shift in the economic trends. Many workers, still wary of the risk of illness, could delay their return to work. Couple that with any resurgence of the virus and the potential that schools will remain closed, or on a staggered or hybrid schedule, and workers could delay reentry and hamper employers’ plans to get back to full capacity. Already several states have halted or retrenched their phased reopening plans as new cases surged again.

Investors appear the most optimistic, fueling a rally in the stock market that closed out June as the best quarter in decades. After a 34% drawdown, the S&P 500 has climbed back roughly 46%, as of this writing. Corporate earnings are at levels not seen since the tech bubble of 2000. Sectors such as healthcare, utilities, IT, communications and consumer staples are all benefiting from the recent market shifts. The stock rebound has perplexed many people given the dire situation, but the economic blow of the past few months and low bond yields present an opportunity to take advantage of the market. As a result, equities are overvalued, and investors should expect volatility as earnings and prices adjust.

So, weak economic data is coming in better than expected, and there are trillions of dollars in stimulus in the pipeline with extremely low interest rates on the horizon for the foreseeable future. Moreover, with Congress debating extension of unemployment premiums and additional stimulus packages, optimism is warranted.

It’s good to remember, though, that this is not just a U.S. problem. Economies around the globe are experiencing a similar or more severe economic crisis. And sectors like business travel and tourism, restaurants and in-person experiences may be forced to operate at less than full capacity for an extended period. Consumers will have fewer reasons to spend their money, and if social distancing and travel restrictions continue, oil consumption will remain stalled.

It’s impossible to predict with any certainty what’s in store for the rest of 2020, but there are enough positive or steady trends to help us breathe a little easier. Knowing your financial goals and having a strong financial strategy in place can help you weather the volatility with confidence. Understanding your specific objectives is even more important in these unprecedented times. Working with a financial professional can ensure your success over the long term.

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