Written by E. Keith Wirtz, CFA®, Vice President & Chief Investment Officer, Union Savings Bank.

The Coronavirus Pandemic of 2020 has delivered an immediate – and likely, lasting – impact on nearly every facet of our “normal” lives.  Rarely have we seen such a sudden and heavy impact on our economy as a result.

The unprecedented shutdown of our economy is in many ways like a massive, slow moving natural disaster. It’s been very disruptive, and government policies and responses have had to react to an unfolding crisis in real-time.  Naturally, the impact on markets cannot be ignored – and knowing how to move forward through this crisis and beyond has many investors on edge.

Even more unsettling could be the seeming “disconnect” between what has been lately going on in the stock market vs what is going on in our communities.  With major indices recovering to where they were at the start of the year – in spite of all the bad news – has many wondering: “what’s going on?”

 

So, what IS going on?

The Coronavirus forced shutdowns throughout the world, bringing everything to a grinding halt.  Practically immediately, millions were put out of work.  The markets tumbled.  It’s as if the economy was moving along nicely – as if heading down a highway making good time – and then entered a construction zone where it slowed to a stop and start crawl.  It’s a great analogy. And adding to the anxiety is no one knows for sure how long the construction zone will continue before we emerge back on to the open highway.

These “depression-like” conditions have led to a swing in the markets like we have never seen.  Volatility is way up, and interest levels have collapsed to levels unseen before. Lately, the markets have made a remarkable comeback to levels seen at the start of the year, despite the fact that there is a growing disparity between pricing and earnings per share forecast for the S&P 500.

 

How can stocks continue to rise when the news is so negative?

The simple answer is that investors have looked past the moment and are looking ahead.  In essence, investors are discounting a better economic condition in 2021.  One key reason for this renewed optimism–the fact that there was such a rapid and massive policy response from governments globally. In the US, there has been a tremendous fiscal response – a money injection equal to 8.6% of GDP. Programs such as stimulus checks, PPP loans, grants and loans to keep big businesses working have all helped soften the blow to the economy. And because the market is future focused, it appears to be saying that the economy will eventually right itself.  (After all, the factors affecting the market are external; as opposed to 2008, when the factors affecting the market were largely within the market itself.)

 

So what now?

While the market is moving into a recovery, there is speculation as to whether it will be a “V-shaped” or a “U-shaped” recovery. In other words, will it snap back quickly, or take a longer period of time?  Within that overall shape, there are other variables, including a “Z” shape and a “W” shape.  Both of these speak to volatility in prices as the market finds its footing.

Looking forward, we expect that the market will undergo a U-shaped recovery as we absorb the bumps in the “construction zone” ahead.  This year, the Fed forecasts a contraction of 5% while next year, predicts a rise of 5%. We anticipate that unemployment will rise this year before it begins to recover next year.  And we expect S&P earnings to contract by 21% and rise by the same amount next year.

No one can say exactly for sure when these trends will begin to shift but we do know they depend on a continued well-run and fine-tuned Fed response to the situation.

Another big fear is whether or not there will be a “second wave” of COVID infections in the fall.  This would impede recovery progress – and worry about this could be why we experienced a rather sudden 1800 point drop in the Dow on June 11.

 

The bottom line.

As an investor it’s important to take a long-term view.  While many sectors are down greatly, especially energy, they will recover and volatility will shrink. Information Technology and Consumer Staples will continue to grow. Maintaining a balanced portfolio is important; one that’s matched against your time horizon between stocks and bonds is a great way forward.  With historically low interest rates, you may want to adjust your bond holdings.

The bottom line is to stay focused on your long-term goals; they will not change greatly as a result of COVID-driven market volatility.

If you would like to have a financial check-up, examine your current investments, and cement a plan for moving forward, call or email us and we can help you gain perspective and confidence in building your future investing plans. https://www.unionsavings.com/investment-wealth-management

 

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