By the Shone Wealth Management Team
After a long holiday weekend spent social distancing and in the comforts of our own homes, we started a new week that saw mixed results for the markets. U.S. stocks floated between positive and negative territory between Monday and Friday, following a winning streak the previous week.
A key reason behind the back and forth? Investors received new data this week that showed just how much the COVID-19 pandemic and the resulting shutdowns have weighed on the economy. In the past four weeks, unemployment claims have reached 20 million, while numbers from the housing industry showed slowdowns in many regions across the country and retail sales dwindled.
Stocks were buoyed by the federal government releasing new guidelines on Thursday afternoon for states to reopen amid COVID-19 shutdowns (more on this below). The markets closed the week on a positive note, with the Dow Jones Industrial Average (DJIA) up 700 points higher at 2.99%, the S&P 500 up 2.68%, and the Nasdaq up 1.38%.
What’s new in terms of government policy?
On Thursday morning, the Small Business Administration announced that its $350 billion Paycheck Protection Program (PPP) has run out of funds, leaving many small businesses and nonprofits unable to apply for emergency loans that would help maintain their payroll during the ongoing COVID-19 crisis. This news comes after a notice was sent to banks Wednesday night that the program was on the verge of being depleted.
In terms of next steps, there are now three phases in the proposed guidelines regarding “reopening” states amid shutdowns:
Communities would enter “Phase 1” when the statistics show a downward trajectory of reported illnesses within a 14-day period, and when hospitals are able to treat all patients without resorting to crisis care.
In addition, before we can enter Phase 1, there would need to be a “robust testing program” in place for all at-risk healthcare workers.
If those criteria are met, the guidelines would still require vulnerable individuals — the elderly and those with pre-existing health conditions — to continue to shelter in place. Schools would remain closed and visits to senior living facilities and hospitals would still be prohibited.
What would change? People who are not at risk would go back to work, provided that they maintain appropriate social distancing. Large venues (the guidelines mention sit-down dining, movie theaters, sporting venues, and places of worship) would be allowed to open under unspecified “strict physical distancing protocols.” Elective surgeries could also resume, and gyms could open, but bars would remain closed.
“Phase 2” kicks in if the states and regions enter Phase 1 and show no evidence of a rebound in cases. Vulnerable individuals would continue to shelter in place, but schools and organized youth activities would be allowed to reopen. Bars would also be allowed to reopen, although the protocols specify “diminished standing-room occupancy.”
If there is no evidence of a rebound, then the state or region could enter “Phase 3,” which would not actually be a full return to normalcy. There would still be physical distancing protocols in workplaces, large venues, gyms, and bars — but employers would resume unrestricted staffing of worksites.
There is no getting around the fact that the economy is experiencing a deep contraction this quarter; it’s an event that many economists and experts have expected since the pandemic first swept across the country in March. While some industries (for instance, education and professional services) have been able to function remotely in light of widespread stay-at-home orders, other industries — such as transportation, leisure, and hospitality — have shut down completely, which significantly hampers economic growth.
But there is reason to believe that once the pandemic dissipates, businesses reopen, and more Americans return to their day-to-day routines, the economy will rebound. Labor economist Edward Lazear — The Davies Family Professor of Economics at Stanford University and former Chairman of the President’s Council of Economic Advisers — recently offered some perspective on the current economic downturn and explained why our current situation is different from other crises, such as the 2008 financial crisis.
“This is a very different phenomenon,” Lazear said, noting that our current economic downturn is supply-based, as opposed to demand-based, since the COVID-19 pandemic has shut off the supply of business activity and labor to the economy. Supply-based downturns are more “V-shaped,” in that they go down quickly, and come up quickly. “In some sense, I would expect demand to be higher in the future, not lower. The reason for that is because there is a good bit of pent-up demand right now,” Lazear said, citing that many Americans would be actively participating in the economy — for instance, eating out at restaurants or frequenting shops — if not for social-distancing and stay-at-home orders, especially since the economy was on strong footing prior to the pandemic taking place.
There is a lot of talk about what the recovery period will look like. Although no one can truly predict what the future holds, we know that based on previous crises, a recovery will happen over time. This idea is in line with our investment philosophy, which explains that we intend to own stocks for the long term.
Strong prospects for economic recovery don’t change the fact that this downturn will have long-lasting effects, such as a reduction in human capital and productivity loss. But as Lazear and other economists (such as Federal Reserve Chairman Jerome Powell) have mentioned, the sooner we are able to get the pandemic under control — either by reducing the spread of transmission through continued social distancing or treatments — the sooner the economy will be able to bounce back.
Over the past few weeks, we’ve reviewed many financial planning topics in our weekly emails, but the two that carry the most relevance to the market’s current state are tax-loss harvesting and rebalancing. It can be difficult to see opportunities through the fog of uncertainty, but these two strategies are part of a disciplined approach we must use in both bull and bear markets to maximize returns. The area in which these two strategies overlap is trading:
This is just a quick glimpse into our larger exploration of this topic through a new article, “The Ultimate Guide to Tax-Loss Harvesting Mutual Funds vs. ETFs.” We’ll be publishing this to our blog and sharing it with you over the next few weeks. Please keep an eye out for that piece, if you’d like to take a deeper dive into our investment strategy and approach.
It can be hard to maintain a positive outlook when you’re faced with dismal news headlines. We just want to remind you that we are here for you as more than just your financial advisor. We are here to listen to your questions and concerns, provide guidance, and offer peace of mind in knowing your financial life is taken care of. If you have any questions or simply would like to chat, please don’t hesitate to reach out to our team. Be well and stay safe.
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