COVID-19, the Economy and the Financial Markets
Our previous article, titled "Stock Market Dip? Portfolio Adjustments to Consider," focused on actions to consider with your investment portfolio during temporary declines in the stock market, as we experienced in early 2020.
Unfortunately, the global pandemic is still around, and the COVID-19 pandemic is causing a significant impact on our health, the real economy and financial markets.
The broader economy is struggling to recover from the impact of the pandemic. However, certain sectors of the stock market have fully rebounded from their decline. While movements in the real economy and financial markets are often related, we are seeing quite a difference during this challenging period.
This article will aim to explain why we are seeing a divergence between the "Main Street" real economy and "Wall Street" financial markets.
The Real Economy
The real economy is what you see all around you – the general flow of goods and services. You purchase groceries, which supports the supermarket so it can pay wages to the supermarket's staff. Employees and companies pay health insurance premiums, which supports the health care industry, and so on.
When the economy came to an abrupt pause in early 2020, millions of workers not deemed "essential" found themselves out of work and the unemployment rate jumped to over 10% (from around 3% before the pandemic). Small businesses were hit particularly hard, especially restaurants and others catering to in-person experiences.
The past few months have seen an uneven recovery. Some industries and regions have been spared of the worst and are on their way back to somewhat normal operations. Others are barely getting by, even with government assistance (such as loans from the Paycheck Protection Program, or PPP).
The survival of many small businesses and ability of families to make ends meet will depend on a combination of government programs, reduction in the spread of the virus and the continued reopening of the economy.
The Financial Markets
In contrast to the real economy, the stock market has rebounded quite well since its March 23 low, particularly large U.S. company stocks measure by the S&P 500 Index (which had fully recovered to its pre-decline value by August).
Diving deeper, we see the S&P 500's returns are primarily led by the largest technology companies, a handful of which constitute over 20% of the market value of the entire index.
The current market optimism began in March with the Federal Reserve Bank announcing trillions of dollars in monetary stimulus, Congress passing the CARES Act to provide over $2 trillion in fiscal stimulus, and promising news on vaccine development – a stark contrast from the pessimism that gripped the market since mid-February.
This exemplifies how the stock market is forward looking. Even though the world was still in rough shape health-wise in late March and early April, the major stock market participants were already looking past this current period of turbulence.
These participants include large institutional investors, such as investment banks, pensions, endowments, hedge funds, and mutual funds. When their money comes into the stock market in the billions, it can move prices, precisely what we saw in late March.
We will not be making any predictions about the next short-term movement of the stock market, nor how long it may take for the real economy to return to pre-pandemic levels of activity.
Instead, we encourage investors to learn from this crisis and remember core investment principles that remain true during choppy and tranquil market periods – hold a diversified mutual fund portfolio, rebalance as opportunities arise, and do not let your emotions allow you to deviate from your long-term investment strategy.
We thank you and others in health care for your work during this challenging period, and hope you and your family stay safe.
This article was authored by Marshall Weintraub, CFP® and Michael Merrill, CFP®, CLU®, ChFC®. Weintraub and Merrill are financial advisors with the independent financial services firm, Finity Group, LLC, and wrote the book Financial Planning Basics for Doctors. To ask them questions or arrange a consultation, email them at email@example.com or visit www.thefinitygroup.com. Office Address: 4380 S Macadam Ave, Suite 245, Portland, OR 97239. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Finity Group, LLC and Cambridge are not affiliated. The S&P 500 Index is unmanaged and cannot be invested into. 297339 DOFU 05/2020