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What Now? How to Handle Investments in an Uncertain Economy

What Now? How to Handle Investments in an Uncertain Economy

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COVID-19 sent the economy into a tailspin. Looking ahead, what can investors expect in the future?

The Short and Long Term Economic Outlook

In the short term we are in a recession. It may even morph into a depression. In recent weeks we’ve seen a slowdown of economic activity that, quite frankly, we have not seen since the Great Depression. Although it’s hard to model because of so many variables, economists are estimating that the GDP for the second quarter will come in as low as negative 25-30% at an annualized rate.

In the very short term, this economic slowdown, caused in part by the number of business shutdowns, is obviously having a deep impact on the market.

Here’s some of the specific advice I’m giving my clients:

What Now - Market Outlook - MDL

Although Congress and the Federal Reserve Board (the Fed) have pumped about $3 trillion in stimulus into the economy, we will see some permanent economic destruction. We will see this reflected in the next few quarters.

In the long term, one thing I am confident of is that we will see a different economy on the other side of the pandemic. We will see changes in consumer behavior and the economic landscape.

For instance, we were already seeing trends toward an increase in e-commerce before the pandemic hit. These trends will only accelerate. As a result of the pandemic, many more people than usual are staying out of brick and mortar stores and opting to shop online. On-demand shopping services like Instacart for grocery delivery will only grow as consumers get comfortable with personal shopping services. These could be great investments for the future.

It’s yet to be seen what the summer months hold. The virus has clearly presented a huge degree of uncertainty in all facets of life. We are unsure of what course the virus will take. As a result, businesses are figuring out how to change their operating models for the short term.

Restaurants, for example, may only be able to accommodate half of their usual number of patrons. Social distancing would require tables to be spread out, which would obviously have a negative impact on revenue.

Until more businesses reopen, even on a limited basis, it’s difficult to project exactly what the economic future will look like. But overall I’m optimistic about the U.S. economy. I believe we will get back to where we were before the pandemic struck in early 2020. The big question is when.

How Can Individual Investors Deal With Market Uncertainty?

In the short term when it comes to investments, we are advising clients to be cautious. Even with the rally we had off of the lows in March, this could be a good time to reduce risk if the recent volatility we experienced in the first quarter was too much for you.

One of the first things we work with new investment clients on is determining their risk tolerance. The volatility we just experienced as a result of the pandemic, while extreme and unusual, illustrates why that first step is so crucial.

The last thing you want to do right now is panic. Instead, this might be a good time for you to work with your investment advisor to take your risk tolerance down a notch or two and adjust your portfolio accordingly. For example, if you are normally at 70% equities and 30% bonds in your portfolio, it might make sense to reduce your risk to a 60% or 55% equity exposure.

While the stimulus packages from the Fed and Congress might be enough to keep us from revisiting the March lows again, I don’t see us going back to all-time highs anytime soon, absent a vaccine or an effective therapeutic treatment for COVID-19.

How Long After Business “Reopens” Will It Take for the Economy to Resume Some Level of Normalcy?

Returning to “normalcy” as we knew it pre-pandemic could take a lot longer than people are expecting. As states are exploring plans to reopen businesses in stages, there is still a lot of uncertainty regarding timelines.

Variables like the amount of widespread COVID-19 testing and monitoring could help determine whether a phased-in reopening is effective. It could also guide authorities in determining how quickly to phase-in activities like sporting events and concerts.

Again, until a vaccine or therapeutic treatment is available for COVID-19, it is nearly impossible to predict when the economy will fully reopen and return to some semblance of normalcy.

What Should You Do Next With Your Investments?

There are two answers to this two-fold question. As we explained above, in the short term we recommend being in a defensive mode with your investments. It might be appropriate to raise some cash. Be cautious and revisit your portfolio’s risk exposure to make sure it’s within your risk tolerance. Get ready to see some pretty disastrous numbers from incoming economic data. Those numbers will be worse than what we saw in the Great Recession in 2008-2009.

On the plus side, the current environment should eventually create a nice tailwind for equities (stocks). When we come out of this — whenever that is — stocks will likely be the best asset class to own. The Fed has driven interest rates down to zero. With interest rates so low, they will eventually go up, which is bad for bonds. Bonds will be an unattractive asset class on the backside of this pandemic, once we resume growth in the economy.

Again, in the short term, be defensive, but in the long term, look to invest in stocks. If you decide to raise some cash now, you can redeploy that money into stocks as the market declines (if we get another big decline). You might even want to adjust your portfolio’s overall stock allocation once we are closer to a vaccine and economic growth resumes. While I believe that stocks will be the better asset to own coming out of the recession, you should still expect there to be volatility. That’s where you can work with your investment advisor to make sure your own level of risk tolerance is reflected in your portfolio.

In the meantime, sectors like healthcare, utilities and consumer staples should continue to perform relatively well in the current environment. Then as the economy accelerates, sectors like technology and consumer discretionary will make sense.

Read more here about investing during the pandemic.

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This is part of our What Now? series, where we consider what business owners should do now to keep moving forward in a drastically changed business landscape.

What Now? A Webinar for Business Owners

Published on May 07, 2020