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Your Easy-to-Understand Guide on Retirement Planning in 2022
NewsDecember 29, 2021
The road to retirement may seem rocky at best, especially with the ever-changing legislation. Although everyone’s retirement is different, 2022 is going to have some big differences from 2021 that will affect almost every retiree and retirement saver to some degree. But fear not, Agemy Financial Strategies is here to help simplify the process and help set you up for a positive retirement outlook.
The ultimate goal for so many is a wonderful and relaxing retirement. Ideally, the road to retirement would come off without any major snags and roadblocks in your plan. Unfortunately that is not normally the case and retirement plans always face challenges. This can be from the volatility of the markets, healthcare plans and the affordability factor or even the risks posed by annual inflation. In addition, you’re likely to face decades on a fixed income, and won’t necessarily have flexibility in your finances like you may have had in previous years.
Retirement planning in 2022 can seem more difficult and complex. There are more volatile conditions than ever with healthcare costs going up, and uncertainty with Social Security. This is why it’s so important to be as prepared as possible before you’re retired and always make room in your planning for unexpected problems. Here is an easy-to-understand guide on retirement planning in 2022 to make sure you’re ready for anything the future may bring.
Review Your Current Financial Retirement Plan
Your life isn’t set in stone, and your financial plan shouldn’t be either. When’s the last time you tweaked yours? Where will your retirement money come from? If you’re like most people, qualified-retirement plans, Social Security, and personal savings and investments are expected to play a role. Once you have estimated the amount of money you may need for retirement, a sound approach involves taking a close look at your potential retirement-income sources.
If you haven’t already, the first thing we recommend to do before creating a retirement plan is to review your financials. It’s important to assess the current retirement plan that is tailored to their goals and factors in things like cost of living, Social Security, and medical expenses. Paying off your debt before retirement to give you more financial flexibility. Financial planning is a process, and it’s one that requires proactivity to work well. While some of the other milestones listed here are good indicators that it’s time to review your plan, don’t wait until something happens to do something about it.
Planning Your Retirement Distributions
Saving money for retirement is only part of ensuring a financially secure future. The other half involves making smart decisions about withdrawing that cash.
The typical “Retirement Age” or the date at which you plan to retire is always established by the contribution plans defined in plan documents. The important thing to remember, this date cannot be later than when you or the retiring party reaches 65 years old. 65 is additionally the age of retirees where the defined benefit plan is calculated.
To make it simple, when you reach this age of retirement, you have the option to receive your benefits in full. If it is a defined benefit plan, then your benefit will come in installments similar to salary paychecks.
There’s a lot of retirement distribution strategies that can be used to stretch money further for a long retirement, and these can be combined and changed over time. Current market conditions, tax rates and a person’s expected longevity are all factors that need to be considered.
Rather than pick a single method to use throughout retirement, talk to Agemy Financial Strategies about how to make the following retirement withdrawal strategies work together.
With the right professional guidance, selecting the right combination of methods can help ensure retirement accounts don’t run dry.
Prepare for Inflation
A study by the National Endowment for Financial Education showed that 96 percent of Americans experienced four or more such “income shocks” by the time they reached age 70. As shown in 2021, inflation can really pick up at times that are unexpected and can severely impact anyone who isn’t prepared. It can also devastate a financial plan that relies heavily on fixed income investments like bonds. If you don’t have the option to re-invest your retirement income, inflation will hit your purchasing power hard. Over time, your dollars will be worth much less.
What this means is you need a financial plan that already factors in for inflation. What we typically recommend is building up a financial plan that has growth assets included. This way your income has more potential to rise over time and you won’t be left making the same income you did for the last decade or more.
With prices rising at their fastest rate in decades, people in retirement or approaching it should take extra care to protect their savings.
Plan Healthcare Carefully
This may or may not come as a surprise; but retiring present day is equal to how much health insurance costs. If you’re someone that is putting off retirement until you’re old enough to get Medicare, double check that this is the cheapest alternative for you and look into all healthcare options.
If you retire before age 65, you have several options for health insurance until you reach eligibility for Medicare. Which options you are eligible for and are best for you depend on your individual circumstances. You may enroll in the state health insurance marketplace, continue your employment-related benefits through COBRA or state continuation, enroll in your spouse’s health plan, or apply for Medicaid. The Affordable Care Act (ACA) has made health insurance coverage when retiring before age 65 a much less challenging situation. This is especially true for people with medical conditions or limited finances—both of which could be obstacles for early retirees seeking coverage in the pre-ACA era.
While planning for retiring in 2022, it’s important to have an affordable healthcare plan. However, it’s not as simple to know what the options are and set up a plan as it was when you were employed and working with your employer on a healthcare plan that worked for you. The retirement income advisors at Agemy can help you achieve your healthcare goals in a safe and secure manner.
Final Thoughts
A retirement plan in 2022 may seem like a daunting task, but financial advisors at Agemy Financial Strategies are here to help you put yourself and finances in the best position for success.
Finding the right financial advisor that fits your goals and lifestyle doesn’t have to be hard. The trusted team at Agemy Financial Strategies is here for your every step of the way to make some real progress on your journey to financial freedom this coming year.
After the stress of the end of a year has settled down for 2021, give us a call to get your retirement plan on track in 2022. Our team at Agemy Financial Strategies wishes you a happy, healthy, and prosperous New Year!
Volatility Returns to the Stock Market, and May Well Stick Around
NewsSeptember was a rocky month for the stock market and may have offered a stark preview of what the final weeks leading up to the presidential election will be like for Wall Street. Towards the end of the month, both the Dow Jones Industrial Average and the S&P 500 were flirting with correction territory, which officially means a 10% decline from their peak highs.* Meanwhile the Nasdaq was down by more than 10%, as the tech rally that has helped buoy the index and the markets in general throughout the Covid-19 crisis ended. With one of the most contentious elections in American history now just weeks away, and the coronavirus still pummeling parts of the economy, a nervous, mostly down-trending market may very well be the norm right up to November 3rd, and possibly beyond that.
In truth, what we saw in September was typical from a historical perspective. The two months before a presidential election are almost always a volatile period for the markets for two reasons. One is simply uncertainty over the election’s outcome, and that’s obviously a big factor where this race is concerned. Most polls continue to show Joe Biden leading among voters, and Wall Street knows a Biden victory would likely mean a rollback or amendment of the Trump administration’s corporate tax cuts. That, of course,
could further undercut economic growth at a time when it’s already shrunk massively due to the pandemic. On the other hand, there is plenty of debate as to whether a Trump victory would automatically be better for the economy and trigger a new market rally—particularly in light of the pandemic.
The other issue that typically makes big investors nervous just before an election is the legislative inertia that occurs. Politicians are too focused on politics to get anything done, and that’s a major concern this year since the House and Senate have yet to agree upon a follow-up to the Coronavirus Aid, Relief and Economic Security (CARES) Act approved in March.** This is true despite the fact that lawmakers and economists almost universally agree that additional relief measures are needed, especially with all the uncertainty still surrounding the pandemic as we head into fall.
Autumn’s Unknowns
As I’m sure you’re aware, the U.S. surpassed 200,000 deaths linked to Covid-19 in September, the most of any nation in the world.*** Meanwhile, infection rates began spiking again across much of Europe, and in parts of America as schools reopened. Will that trend continue as autumn deepens? It’s possible, and the economic impacts could ramp up again too as outdoor seating options that have allowed many restaurants and other businesses to hang on during the summer months disappear in colder parts of the country. The dining industry has already been hit extremely hard by the pandemic. According to an economic impact analysis by Yelp, over 50% of its restaurants had already closed permanently by early summer, and the number has likely increased since.****
Even if no major resurgence in infections does occur this fall, the economic fallout of the coronavirus crisis seems likely to drag on for other reasons. Those include the psychological impact of the pandemic, and the comfort level most consumers have attained with alternative forms of shopping and recreation. Already, major chains have announced they will not host traditional in-store “Black Friday” sales this year, and for the first time ever, the Macy’s Thanksgiving Day Parade will be an entirely virtual event!
So far, the massive shift to things like e-commerce, videoconferencing, and virtual entertainment has managed to offset the impact of business closures and social distancing rules and helped limit some of the economic damage from Covid-19. However, the longer-term repercussions of this shift have probably yet to be felt as they relate to things like jobs, bottom-line corporate growth, and overall economic stability. Big investors know this, and it’s another reason they’re likely to keep “one finger on the trigger” in the last quarter of the year, ready to pull out if nervousness gives way to fear and triggers another major market downturn.
Uncommon and Unprecedented
While a nervous market in the months before an election is historically common, there also some things about our current situation that make it very uncommon—namely the pandemic and the highly divisive political climate surrounding this election. So far Wall Street has shown amazing resilience in the face of these issues, but that’s due largely to another factor that isn’t merely uncommon but entirely unprecedented. That is the massive amount of artificial stimulus the Federal Reserve has pumped into the economy since the Financial Crisis 10 years ago— which has become even more massive as a result of the pandemic.*****
Will the Fed’s “steroids” continue to pump up Wall Street and stave off another major correction even if coronavirus cases see another major spike this fall? Or even if another relief and stimulus package is not approved? Or even if there is a lengthy legal and congressional battle over the results of the election that prolongs legislative inertia and keeps Washington stuck in the muck like a stalled Jeep?
The bottom line is that these are all important questions to consider as you review your financial strategy this fall. Are you playing smart and sufficient financial defense at this crucial time? Are you well-positioned to take advantage of new opportunities that may emerge one day when the markets and economy are more stable again? Because, rest assured, that day will come!
*Marketwatch.com **“Virus Bill Blocked in Senate as Prospects Dim for New Relief,” AP, Sept. 10, 2020 ***“Unfathomable US Death Toll from Coronavirus Hits 200K,” AP, Sept. 22, 2020 ****“Yelp Finds 53% of Restaurants Have Permanently Closed,” Eater.com, June 26, 2020 *****“Stock Markets Have Now Seen the Peak of Fed Stimulus,” MarketWatch, Sept. 17, 2020
Big Tech & the Fed are Still Keeping Wall Street Happy — For Now
NewsTwo down and one to go. Or should I say two up and one to go? I’m talking, of course, about the top three major stock market indexes. In August, the S&P 500 joined the Nasdaq in surpassing its record peak high from before the start of the Covid-19 pandemic.* Only the Dow Jones Industrial Average has not yet (as of this writing) set a new record—although it, too, has been getting close. The situation reveals some interesting and important things about the market’s recovery overall, and about how things could play out in the next two months leading up to one of the most contentious presidential elections in U.S. history.
As you know, all the major indexes dropped by nearly 40% in March right after Covid-19 was declared a pandemic. That was a flight to safety, and all the markets fell quickly before starting to inch back up as the economic impacts of the crisis became clearer. One impact was that some industries would actually benefit from all the shutdowns, including the tech industry. That’s why the Nasdaq—which is very tech heavy—managed to rally past its pre-pandemic peak by early June. The S&P rallied more slowly but has also benefited from having the nation’s seven largest tech giants among its 500 companies. In fact, those seven companies—which include Microsoft, Apple, Amazon, and Facebook—make up 25% of the index’s weighting, and therefore its growth. So, if those companies are doing really well, it skews the index, making it somewhat deceiving as a snapshot of the recovery overall.
Normally, when the whole stock market is at or near a record high, it means that more than half the stocks being traded are also at record highs. However, right now the opposite is true: far less than half the stocks are at record highs, and the market is largely being carried by these tech companies and a few other major players, such as large retailers who’ve adapted to the pandemic with online sales.** The bottom line is that this recovery has very little breadth, and we’re still waiting on a broader recovery that includes more of the traditional high-dividend-paying consumer companies. In the meantime, the market may continue nudging higher based on pure momentum, even pulling the Dow up past its pre-pandemic peak eventually (provided investors aren’t creating another tech “bubble” that’s destined to burst and bring the whole market down with it, as we saw in early 2000).
The Fed Factor
Of course, the even bigger factor in the market’s recovery (as I’ve pointed out frequently) is the Federal Reserve. In response to the pandemic, the Fed announced more quantitative easing and lowered interest rates to near-zero—moves that always make Wall Street happy because they create cheap money and push everyday investors up the risk curve and into the stock market. Then in August, the Fed announced plans to keep interest rates near zero for the next three or four years, giving the markets a level of forward guidance that was (like many of the Fed’s actions in recent years) unprecedented. While I still believe the stock market could see another big correction of at least 20% or more before this crisis is over, if anything can prevent that downturn from happening, it might be this latest announcement by the Fed. Here’s why:
Low interest rates (as I already mentioned) push everyday investors up the risk curve by making other investment options appear less attractive. They also artificially inflate the present value of stocks by making discount rates lower. In addition, while low interest rates are supposed to stimulate the economy by creating so-called “healthy” inflation, we’ve already learned from the Financial Crisis that it doesn’t work that way. The Fed kept interest rates near zero for seven years after 2008, and all it really did was fuel a big asset recovery that was largely out of whack with the much slower and weaker economic recovery. I foresee the same thing happening again because Baby Boomers are still the nation’s biggest spenders. With interest rates low, the market high, and the economy plagued by uncertainty, I believe they are more likely to continue saving and investing rather than spending. All of this could help keep the stock market buoyed even if earnings and employment numbers remain below pre-pandemic levels for a while.
Of Pandemics and Presidents
On the other hand, all that economic uncertainty I mentioned could end up playing a much bigger role in the markets than it has so far, regardless of the Fed. The coronavirus pandemic has been blamed for over 200,000 American deaths, and although new cases have decreased from the huge spikes we saw in July, they remain as high now as they were at the height of the economic shutdown in March and April. With schools reopening this month and cooler weather soon to limit outdoor dining and recreation options in many states, cases and deaths could very well start rising again, leading to more business closures and more unemployment. Let’s not forget, too, that an estimated 30 million Americans are still collecting unemployment now, and that Congress has yet to agree on a second round of coronavirus relief.*** Could all these factors be a time bomb ticking away at the base of the booming markets? Only time will tell.
Of course, the other big factor heading into the fall is the presidential race, one of the most divisive and uncertain in our nation’s history. While Wall Street—generally speaking—loves Donald Trump, a large faction of the country does not. Most polls have shown Democratic nominee Joe Biden leading among voters for some time, and a Biden victory would most likely mean a rollback of Trump’s corporate tax breaks and a resulting decrease in corporate profits. If Biden is still leading by a healthy margin in October (which is historically already a shaky month for the markets), could it trigger a major selloff? Again, only time will tell. For now, my advice for investors in or near retiring is to stay focused on income—and on setting your portfolio up to take advantage of some potential new opportunities that may emerge when the uncertainty lessens and the world makes a little more sense again.
*“S&P 500 Sets First Record Since February”, Wall Street Journal, Aug. 18, 2020
**“Stocks Mixed but Tech Shares Keep Party Rolling,” Yahoo Finance, Sept. 1, 2020
***“How Many Americans Are Out of Work Right Now?”, Market Place, Aug. 6, 2020
With Markets Holding but Covid-19 Still Spreading, What’s Next?
NewsIn last month’s newsletter, I noted that July could be a pivotal month for the coronavirus crisis and the economy, and it was. Two big questions were answered: will spiking Covid-19 cases slow the economic reopening, and can the financial markets remain stable despite that slow down when faced with hard data about the pandemic’s second-quarter impact? The answer to both questions was, yes.
In fact, the Dow Jones Industrial Average finished July about 900 points higher than it started the month, and barely registered a blip when the Commerce Department reported the US economy shrank by an annualized rate of 32.9% in the second quarter thanks to the pandemic. That is a record contraction, but about in line with what many economists had forecast. Personal spending, which makes up about two-thirds of GDP, fell 34.6%, also the most on record.* Other major market indexes shrugged off the grim news, too, and the Nasdaq even hit a new all-time high on the first trading day of August.
Overall, it seems that big investors remain optimistic the economy can still make a strong recovery by year’s end despite its record shrinkage and spiking virus cases that have led to spiking unemployment numbers. They may be right, but I believe it hinges on three factors all going positively in the next six months: the virus (we have no major resurgence over what we’ve already seen), the vaccine (we get one and it works), and more government relief (it gets approved and is sufficient). Let’s look at where each issue stands now.
The Virus
In late July, the US hit a sobering Covid-19 milestone: over 150,000 reported deaths from the virus. What’s more, many analysts say the numbers may only get worse at an increased speed. Yahoo News reported the Centers for Disease Control expects up to 11,000 more American deaths per week in August, which would bring the death toll close to 200,000 by month’s end.**
The rising death toll is the result of a surge in new cases throughout the country, which started just weeks after states began reopening their economies and relaxing preventive measures such as mask mandates and social distancing rules. While some states have either paused or reversed their reopening efforts as a result of rising cases, others have resisted calls from health specialists to do so. Whether they will be able to continue resisting remains to be seen, but the answer may play a huge role in determining whether the economic recovery stays on track or comes completely off the rails.
While this situation is frustrating, it isn’t very surprising. Many analysts warned against reopening too quickly and predicted spikes would likely occur even under the best of circumstances. I’ve pointed out that unemployment numbers are likely to ebb and flow for the rest of the year as many reopened businesses are forced to close or scale back again in response to rising cases. Nevertheless, Wall Street appears hopeful, and it’s likely that much of their hope hinges on improving prospects for a vaccine.
The Vaccine
Several coronavirus vaccines are moving quickly through the development pipeline. There is a good deal of optimism around several of them, including one from Moderna now in Phase 3 clinical trials, and another that Pfizer executives say could be available by the end of the year. The Department of Health and Human Services’ “Operation Warp Speed” initiative has set an ambitious goal of delivering 300 million doses of a safe, effective vaccine by January.***
That’s all potentially good news, but analysts caution that no vaccine is a magic bullet. Its impact depends largely on how many people are willing to take it and, of course, on the effectiveness of the drug itself. Keep in mind, as I pointed out in a previous newsletter, last year’s flu vaccine was reportedly just 45% effective against the 2019-2020 seasonal flu.
More Federal Relief
All other issues aside, the stock market’s ability to rebound from its initial drop at the start of the pandemic has depended largely on the historic economic relief efforts undertaken by Congress and the Federal Reserve. While the Fed has said it has no immediate plans for more relief, Congress was working out the details of a new package as August began, and enhanced unemployment benefits of $600-per-week expired for about 30 million Americans.
It’s uncertain how long partisan haggling will delay the new relief package, but it seems likely that something will be approved sooner rather than later. Some economists have pointed out that the lapse in enhanced unemployment benefits as negotiations drag on could generate a negative impact on consumer spending of about $12 billion per week.****
For the market to avoid another major pullback, I believe all three of these factors must develop positively in the next six months. Beyond these key issues, there are many other factors that could impact the direction of the economy and the financial markets in the months ahead. Ultimately, the Age of Economic Uncertainty we had already been in before this crisis has been taken to a whole new level in the last four months. Many new risks have emerged, along with new opportunities. During this time, I believe it is crucial for investors in or nearing retirement to measure these risks and opportunities carefully, and to continue making sure you try to protect your investments and your retirement income!
Honoring your trust and confidence,
Andrew, Daniel and your AFSi Team!
*“US Economy Shrinks in Second Quarter,” Garden City Telegram, Aug. 2, 2020
**“CDC Says This Many Americans Will Die from Covid This Month,” msn.com, Aug. 3, 2020
***“A Coronavirus Vaccine is Coming; Just Don’t’ Call it ‘Warp Speed,’” New York Times, Aug. 3, 2020
****“Stocks Rise With Earnings, Stimulus Talks in Focus,” Yahoo Finance, Aug. 3, 2020
Keep Building Up Or Healthy Dose Of Caution?
NewsMarket May Keep Building Up, Blowing Off ‘Froth’ for Some Time
July could be a pivotal month in the coronavirus crisis for many reasons. With the infection rate spiking in several states as June ended, we’ll find out whether these outbreaks can be contained without a major setback to reopening efforts nationwide. By mid-August, we should also see the release of corporate earnings reports, second-quarter GDP numbers, and other data that will give us a clearer picture of the true economic impact of the crisis so far. How the financial markets respond to these developments will be telling—although I believe the shaky holding pattern the stock market has been in, may continue for some time.
As you know, Wall Street has done a good job so far of staying laser-focused on good news while shrugging off bad news. As a result, the stock market was able to rebound from its initial drop of nearly 40% and has remained down by only about 10% for most of the pandemic. However, its hold on that relatively slight drop has been tenuous at times. That’s typical when a market is overvalued and experiencing a blow-off top rally, which is what I believe is happening. This is a period of irrational growth that occurs without the economic fundamentals to support it, and I believe in this case it also is occurring despite a lot of socio-economic uncertainty.
In truth, I believe this market was already in a blow-off top period before the coronavirus hit. The pandemic has simply made the market’s top “frothier” and more vulnerable to getting blown-off, as was clearly demonstrated last month. When the labor department reported in early June that the unemployment rate decreased slightly in May rather than increased as most analysts predicted, the Dow Jones Industrial Average quickly shot up 800 points.* Never mind that the real unemployment rate for the country still stands at close to 19%; just because the job news for May was slightly less bad than expected, Wall Street went crazy!
It went crazy again when the commerce department reported that retail sales rose by a record 18% in May.** Never mind that sales had shrunk by a record 16.5% in April, or that second-quarter GDP shrinkage is now expected to exceed 50%.*** Wall Street focused only on the good news, and the Dow added another 600 points.
Healthy Dose of Caution
Just as quickly as froth can build up during a blow-off top rally, it can be blown off. This happened only a week after the jobs report spike when Federal Reserve Chairman Jerome Powell said some things that were already obvious to most economists, namely that this recovery is likely to be slow, and that unemployment may still stand at between 8 and 10% by the end of the year. With that, the Dow dropped 1,800 points, its biggest drop since March.****
This rapid change also illustrates why a blow-off top period can be so volatile. Big money investors don’t really care whether a market spike is supported by economic fundamentals. Most are short-term traders and they just want in on the spike so they can make money. However—as I’ve noted many times—they also keep one finger on the trigger, ready to pull out whenever the next big selloff starts. That’s exactly what we saw in mid-June, and it’s probably what we will continue to see as reopening efforts proceed and more data emerges about the pandemic’s impact on every sector of the economy.
Ultimately, I believe that dramatic 1,800-point blow-off in June was a good thing because it brought a dose of healthy skepticism and caution back to the markets. There was little of that throughout April and May, and the lack of it may have put some everyday investors at risk of falling prey to the psychological trap of “FOMO”—or “fear of missing out”—and buying back into the market at a dangerous time. FOMO is always a danger during a blow-off top period, which is why it’s so important to keep things in perspective. Yes, the stock market has shown remarkable resilience during the coronavirus crisis so far, and there are some analysts who continue to believe the worst is already over for Wall Street. But considering all the potential setbacks to reopening, and the fact that we still don’t have a coronavirus vaccine, I’m not that optimistic—nor are most economists.
A Narrow Range
What’s more, even if a vaccine is discovered soon and virus spikes are quickly contained, the systemic damage already done to the economy may be more extensive than we realize. That’s why the next six weeks could be so pivotal since second-quarter earnings and GDP figures will help make that picture clearer. Either way, I believe we will continue to see more weeks like we saw in mid-June, with froth building up and blowing off in an ongoing cycle. As a result, I believe the market should continue to trade in a fairly narrow range. Where it goes when it breaks out of that range will depend on how the pandemic plays out in the coming months. If a lot of things go right (the outbreaks subside, we get a vaccine, etc.) it could go up. If just one thing goes wrong, however, it could go down significantly again.
As I pointed out in last month’s newsletter, the next downturn may not be as precipitous as the first, but I believe it will return the market to bear territory and possibly test its low point from March. The important thing for everyday investors to do during this period is to keep things in the right perspective, stay focused on asset protection, and be aware of the potential dangers of “FOMO” whenever the market’s blow-off top is building up froth again.
Honoring your trust and confidence,
Andrew, Daniel and your AFSi Team!
*“May Sees Biggest Jobs Increase Ever of 2.5 Million,” CNBC, June 5, 2020
**“US Retail Sales Rose Record 18% in May,” Wall Street Journal, June 16, 2020
***“GDP is Now Projected to Fall Nearly 53% in the Second Quarter,” CNBC, June 3, 2020
****“US Stocks End Sharply Lower as Coronavirus Worries Return,” Wall Street Journal, June 11, 2020
Does a V-Shaped Economic Recovery Make Sense to You?
NewsDoes a V-Shaped Economic Recovery Make Sense to You?
You don’t need me to tell you May was a chaotic month for America. It began with the highest one-day coronavirus death count since the start of the pandemic* and ended with violent street protests and renewed trade tensions with China.** In between we saw states cautiously reopen, even as the economic damage caused by the pandemic continued to mount. In fact, the only things that seemed relatively calm in May were the financial markets. The Dow ended the month nearly 2,000 points higher than it started, having recovered by nearly three-quarters from its low point in March. The bond market was also calm, with the yield on the 10-Year Treasury rate up slightly by month’s end, although still below 1%. What does it all mean?
Well, some Wall Street cheerleaders argue that it means a V-shaped recovery from the coronavirus recession is possible. Even with unemployment and economic shrinkage at historic highs, they claim the economy has already bottomed out and will only keep trending upward now that businesses are reopening and quarantines are being lifted.*** They say the stock market supports their argument because if big investors are confident in the midst of all this chaos and bad news, then everyday Americans should be, too. They argue further that the unprecedented aid provided by Congress and the Fed in response to this crisis (which includes open-ended quantitative easing) will also help ensure a V-shaped recovery. Never mind history and the fact that the stock market dropped by nearly 60% during the Great Recession, and by 90% during the Great Depression. These analysts say, “This time will be different”!
On the Other Hand
Of course, certain analysts will always make this argument during any economic crisis or pending crisis, and maybe this time they’ll be right. Anything is possible. On the other hand, many more have been arguing that a V-shaped recovery is highly unlikely for many reasons.**** Personally and professionally, I believe a W-shaped recovery—where the markets see at least one more major downturn—is more probable. The fact that the stock market is currently down only about 10% from its peak highs only reinforces that belief. Here’s why:
For one thing, it illustrates the dangerous disconnect between the stock market and economic fundamentals. I’ve been talking about this disconnect for years, but the coronavirus crisis has made it (like so many other things) more obvious—and potentially more dangerous. ***** The argument for a V-shaped recovery conveniently ignores the possibility of another major virus outbreak, and how it might set back the economic recovery.
However, even without another outbreak, consider some of the following facts. Though states are reopening, the unemployment rate is still historically high, and rather than decrease steadily, I believe those numbers are likely to ebb and flow for the rest of the year. With restrictions and partial shutdowns still in place, some businesses will have to try to get by on 50% of their normal revenue, and many simply won’t be able to do it. To me it seems likely that unemployment will still be at around 10% (at least) by the end of the year, which is slightly higher than it was at the peak of the Great Recession.
What about growth? Let’s say we do see growth get back on track in the third quarter, as advocates of a V-shaped recovery are predicting. That would be great, of course, but remember, the GDP was only at about 2.5% before the crisis, not 5 or 6%. Then, in the first quarter it shrank by nearly 5%, and even the Congressional Budget Office has forecast it will shrink by as much as 30 to 40% in the second quarter.****** So, how will all of that balance out by the end of the year? Mathematically speaking, a GDP of -10% for 2020 would probably be a best-case scenario!
Common Sense
So, the question is: does any of that sound like it should justify steadily rising stock prices? Does it sound like the makings of a V-shaped recovery? Not to me, and not to most global fund managers either, of whom only 1 in 10 believe a V-shaped recovery is possible.******* I concur, and continue to believe that the stock market will experience at least one more major pullback before it truly starts to recover. It may not be as precipitous as the first drop, but it will return the market to bear territory and possibly test its low point from March. I also believe the drop may be more gradual (two days up, three days down, two more up, etc.) and more segmented. In March, there was a flight to cash, and everything dropped: stocks, bonds, and bond-like instruments. This time, investors and advisors will have had time to analyze what should and shouldn’t be sold, meaning riskier holdings may drop more than conservative ones.
In the mist of all this disconnection and uncertainty, income-based investors can continue to take comfort in the knowledge that their portfolios are, generally, better protected from loss and shrinkage than those of growth-based investors.
If, on the other hand, you still have significant investments elsewhere in common stock or stock mutual funds (or you have friends or family who do), you might want to re-read this newsletter and ask yourself: “What do I think? Do I hold with the analysts who claim ‘This time will be different?’ Do I believe the stock market makes sense right now considering all the economic data, and that we’re on our way to a V-shaped recovery? Or do I believe another pullback sounds more likely?” Those are crucial questions because, as I always stress, smart investing isn’t just about numbers and textbook formulas. It’s also about plain old-fashioned common sense!
Honoring your trust and confidence,
Andrew, Daniel and your AFSi Team!
*“Stocks Slightly Higher Amid Unrest, US-China Tensions,” Yahoo Finance, June 1, 2020
**“The US Just Reported it’s Dealiest Day for Coronavirus Patients, CNBC, May 2, 2020
***“US Economy to See V-Shaped Recovery: Morgan Stanley,” Fox Business, May 11, 2020
****“A V-Shaped Recovery is ‘Off the Table,’ Fed’s Kashkari Says,” MarketWatch, May 14, 2020
*****“A Dangerous Gap: The Market vs. The Real Economy,” The Economist, May 7, 2020
******“What is a V-Shaped Economic Recovery & How Likely is It,” MercuryNews.com, May 27, 2020
*******“Just One in Ten Fund Managers Expect a V-Shaped Recovery,” Financial Times, May 2020