The National Bureau of Economic Research, a private but highly regarded think tank, finally noticed we went into a recession in February1. That announcement came on June 8, the same day the S&P 500 returned to being positive for the year2. I’m sure the timing was coincidental. The NBER examines a wide variety of data to put a precise date on when the punch bowl ran dry. That’s interesting for economic historians and for testing new investment strategies, but investors aren’t concerned with February. We always need to look ahead.
Most of this seems a relief rally. We’re just relieved the pandemic and unemployment numbers are coming down; we’ll sort out earnings later. Once the S&P 500 declined by over 34% from its high3, investors had taken enough money off the table to sort through the rubble for any possibility of something going right. Sure enough, infection rates slowed and, though we don’t have a vaccine yet, we have the sense that one will come eventually. Restaurants across the country are beginning to open. As I said, I’ll take it.
But we are not out of the woods yet. We recognize that relaxing the pandemic restrictions will lead to increased infections, or at least a slower decline. We have virtually no idea what will happen once unemployment benefits run out, especially if Congress and/or the President misjudge whatever stimulus is still needed. If they pay too much in unemployment, there’s little incentive for workers to return to work. If there’s too little, then people suffer. Arguably, in its rush to prevent suffering, benefits—nationally, certainly less so in Florida—were too high. The Fed also faces the tricky challenge of threading the needle between maintaining low interest rates and weaning the economy from continuous aggressive government intervention.
I also have one distant, slim worry. The government has taught us it will bail investors out even if we misgauge risk. The pandemic came out of virtually nowhere (I won’t speculate on the root cause), so it seems unfair for American citizens to suffer. But, once investors take it for granted the government will intervene for any problem, we’ll begin to ignore risks. High yield bonds will appear safe. High risk businesses will get too much money. Eventually, our long-term growth rate can slow because we are not making room for successful businesses.
The benefit to allowing some businesses to fail is a consistently high growth rate. The trade off, unfortunately, is occasional disruption. Horseless carriage companies needed to make way for car manufacturers. Though we don’t manufacture many television sets in the United States, we do have Apple, Amazon, SpaceX and Netflix. It might take decades for this long-term growth issue will take to play out. But the market can readjust suddenly if many investors buy into it at the same time. The first sign might appear in lower worker productivity or a lower earnings growth rate.
I am happy with how rapidly the government began to address the economic crisis. It isn’t perfect, but at least it was quick and powerful. I’m relieved the crisis hasn’t been worse (for now). But we can’t take anything for granted. We see daylight, but we aren’t out of the woods quite yet.
Evan R. Guido is President of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Advisor at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or email@example.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way Suite 119, Lakewood Ranch, FL 34202. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth ManagementSM or its subsidiaries.