by Jordan Hucht, CFP®, ChFC®, AIF®
As the public health crisis and our corresponding response continues to evolve, we’re finding ourselves staring down the tunnel of weeks, if not months, of continued uncertainty. Our way of life has been interrupted, and we’re doing things that just a few months ago would largely be unthinkable.
From an economic perspective, the damage is mounting, and our financial markets are reflecting that. These are difficult times, to say the least, and there is likely no shortage of dire news to come. So as we head into another week of what is expected to be continued volatility, let’s consider where we are, where we may go from here, and what to do along the way.
Where Are We Now?
Priority one is and will continue to be to address the public health crisis and put our health care system and workers in the best possible situation to provide care to those in need. Surely by now, you’re intimately aware of the measures being taken locally and across the country, so I won’t elaborate on that here.
Rather, let’s focus on where we are in the fight against economic damage and the response of the financial markets. As we’ve discussed before, financial markets have sold off aggressively over the past few weeks as valuation metrics for stocks have been flipped upside down and overall risk appetite in the markets has quickly eroded. The market has priced in a US recession, which at this point seems probable, though not surprising considering the sudden halt in economic activity.
The Federal Reserve has taken drastic actions very quickly, initially with cutting rates to zero and most recently by expanding asset purchases to include municipal bonds (along with several other measures in between). The Fed’s response speaks to the urgency and fragility of the situation at hand. We’ve seen the first data on economic damage coming in with last Thursday’s jobs report, which will almost certainly look quite mild compared with this week’s.
And we await lawmakers in DC to finalize a fiscal stimulus package that is likely to approach $2 trillion. With people, businesses, and the economy as a whole already feeling the effects of economic stoppage in big ways, the hope is that this stimulus can carry us through until normal economic activity can resume. This will be the news of the week.
Where Do We Go From Here?
To oversimplify an inherently complex situation, consider the analogy of us trying to cross rough seas without our boat sinking. The skies will eventually clear and the seas will calm, but we need to make sure our boat is still floating. If fiscal stimulus and Fed intervention are enough to get us through the storm with our boat intact, we can reaccelerate and hope for smoother sailing beyond the storm. Without doubt, it will be an unpleasant ride and there will be damage to our boat. But with the right fiscal and monetary policy support, our boat can survive the storm, though it will take time to fully repair the boat.
If we see comprehensive fiscal policy passed this week, it could be the first good news the market has seen in weeks. However, there is still likely more bad news than good in the near term, and we’re not likely to see the markets stabilize until there’s confidence that the outbreak has been contained. That’s probably weeks (or longer) away, and news of economic damage will continue in the interim. We’ll see this soon in labor markets and eventually in earnings, and the market is bracing for it. Again, we know there will be damage to the boat during the storm. And from a financial markets perspective, it’s likely to get worse before it gets better.
The storm will eventually end and the skies will clear. How much damage has been done to our boat along the way will determine how quickly we’re able to resume sailing as we were before. The goal is that monetary and fiscal policy support are sufficient in getting us through the storm and that our boat – the US economy – is back on course later this year. If too much damage to our boat is done, it will take longer to get back on course. There is a range of potential outcomes here, but we can point to history as a testament to the resilience of our economy in other crises of varying economic severity.
What Do We Do Along The Way?
From a financial planning perspective, the best way to survive a storm is to be prepared before the storm begins. That means being attentive to cash flow needs, asset allocation, and time horizon, and having a plan to weather the storms you don’t know are coming.
In the midst of a storm, as we are now, it’s important to revisit the financial plan, recall the rationale for asset allocations, and review any planning assumptions that may have changed. On the portfolio level, we’ll look for opportunities to tax-loss harvest within equity allocations and consider increasing credit quality and shortening duration in fixed-income allocations. Making drastic, shortterm adjustments to overall asset allocation within a portfolio should be approached with caution, as venturing off course typically only replaces one risk with another.
When it comes to financial planning and investment management, always remember to look through the lens of a broader perspective and prioritize long-term outcomes above short-term emotions.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.