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Wednesday, May 27, 2020

Economic update: ‘The long-term trend has been upward’

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Jakob Bower
Jakob Bower
Jakob Bower has over ten years of business experience and resides in Muscatine with his wife, and their two children. Jakob is an active member of the Greater Muscatine Chamber of Commerce and Industry, Young Professionals Network, and theChamber Ambassador Network.

Public health and financial security continue to dominate the news during the coronavirus pandemic, with market volatility and sweeping shutdowns now part of everyday life. But here’s a little good news; when saving toward retirement, you can lean on reassuring lessons from decades of market history. Each downturn teaches us that, “there was a lot of opportunity at the bottom of those cycles,” says Seema Shah, chief strategist, Principal Global Investors.

In other words, withdrawing savings at the bottom of the market means you may miss its eventual recovery and growth. “The long-term trend has been upward,” Shah says. “You may see volatility and dips here and there, but the trend has been upward.”

There’s no doubt this month’s volatility has been extreme. United States stocks on Friday, March 13, saw their largest daily gains since 2008—a day after the Dow and S&P 500 Index suffered their worst plunge since October 1987. On Sunday, the Federal Reserve made an emergency interest-rate cut to zero. Monday marked the third time within a week the stock-market “circuit-breaker” paused trading for 15 minutes to calm investors—on the way to the Dow Jones Industrial Average’s worst daily point drop in history, nearly 3,000 points.

The market decline from peak to bottom a dozen years ago during the global financial crisis took more than a year (354 business days), Shah says. The current slide has been a whirlwind of just 24 working days. Remember, your investment decisions don’t need to match the dizzying pace of this volatile market.

In a seesawing stock market, tip toward optimism:

All this financial noise, with images of stores cleared of every scrap of toilet paper, is unsettling. This has become a historic moment when people who typically don’t pay attention to financial news now can’t help but hear headlines of every move made on Wall Street.

But both Shah and Bob Baur, Ph.D., chief global economist for Principal, say strong underlying economic fundamentals, combined with comprehensive government remedies, can likely guide us toward recovery later in 2020.

This sharp shock of extreme coronavirus containment measures worldwide—with schools canceled for weeks and entire offices emptied to allow employees to work from home—can be taken as a good sign. The jolt should help provide a faster recovery both for public health and financial markets.

Major retailers such as Apple have been closing stores in the U.S. as part of the “social distancing” used to help slow the spread of coronavirus, but we can also already see the pattern of recovery as Apple stores in China reopened last week after a monthlong shutdown.

Think of this occasional and inevitable volatility that courses through markets as part of the “equity risk premium” that can make investing in stocks more lucrative over the long term.

We don’t always recognize it, but virus outbreaks also are a normal part of life that must be continuously managed—both through good personal hygiene and close monitoring by government agencies. The 1918 flu pandemic has received a lot of attention as a historical comparison to today, but the last century is a story of consistent effort by the Centers for Disease Control and other organizations to prevent or mitigate widespread outbreaks.

Both Shah and Baur see a lot of reason to anticipate the global economy to rebound later this year. “On the other side of this, markets will be powered by a lot of help from governments and central banks,” Shah says.

More valid reasons for market optimism:

The Fed cutting interest rates to zero shows that central banks are left with “very little ammunition,” Shah says. Yet all that stimulus will be there to help encourage the pent-up demand in economic activity once the worst of the pandemic has passed. Remember that the banking system today is generally healthier and better capitalized than it was during the 2008 global financial crisis.

Low oil prices (the result of a price war between Saudi Arabia and Russia) are more complicated today because of how the U.S. benefits from its own domestic oil production, but in general, low prices should be a boon for consumers and help fuel economic recovery later in the year, Baur says.

Small and medium-sized businesses are particularly vulnerable during the COVID-19 crisis, as much of commerce grinds to a halt. Businesses with fewer than 500 employees represent 47% of private sector jobs (PDF) in the U.S. and since 2000 are responsible for 65% of net new jobs. So it’s natural for their employees to worry, but government assistance for small businesses in Britain and Italy has helped to model similar help for businesses in the U.S. Countries hope to benefit in the next year to 18 months from a coronavirus vaccine already under development.

Remember that this is “an event-driven shock” to everyday life and the financial markets, Shah and Baur say. While this feels overwhelming (maybe even panic-inducing) now, history tells us things will improve.

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