Is There Really Light at the End of the Tunnel?
by Rachna Bijlani, CFP®
April 17, 2020
The target Fed Funds rate is now in the 0 – 0.25 % range and the CARES Act, which was signed into law by President Trump on March 27th, 2020 is a $2 trillion economic relief package intended to provide fast and direct economic assistance for American workers and families, small businesses, and preserve jobs for American industries. Our country is employing all possible fiscal and monetary policy expansionary tools to keep the American economy afloat. These proactive measures taken by our leadership were the need of the hour and will definitely soften the blow of the recession, but the big question is, “Is there an end in sight to the current crisis?” I am sharing my perspective on what I think recovery might look like and what we can do as individual investors to tackle the current COVID-19 inflicted calamity.
On one end of the spectrum, we have people who believe that the stock market will make a speedy V-shaped recovery as soon as we re-open our economy and on the other side there are those who believe that this might even be worse than the Great Depression of 1929, that lasted 10 years. It is certain that financial markets and global economy are going to be challenged for some time, but I believe that there is indeed light at the end of the tunnel. This started as a medical crisis that transformed into a global economic crisis so the speed of economic recovery is obviously dependent on how soon we can control the medical aspect of the crisis. Our government as well as public and private sector companies having been working diligently to bring the situation under control and their efforts are highly applaudable. However, it will take some time to repair the economic damage due to decreasing GDP and increasing unemployment. In my opinion, the stock market will experience high volatility over the next 4 to 6 quarters before reaching a stage of steady growth. Healthcare and Technology sectors will lead the recovery but sectors like Transportation and Hospitality might have a tougher road ahead. Commercial and residential real estate might experience setbacks. We will start seeing increasing unemployment in the next six months after companies revaluate their actual vs expected quarterly performances. Businesses that do not have enough liquidity to cover their average variable costs in the short run or their average total costs in the long run will permanently shut down. Companies that expanded to bubble point due to prevailing low interest rates will find it more difficult to deal with decreasing demand and built-up inventory. The increasing dollar index will negatively impact exports thereby slowing down growth. Fear and behavioral biases can deter individuals from investing and fear about the economy’s future can cause banks to behave cautiously and hold more excess reserves rather than make loans, leading to a liquidity crisis, further slowing growth. In my opinion, all the above factors will play out in the next 12 to 18 months after which, we should be able to see steady growth. It’s not going to be easy and we will see some major economic restructuring, but we need to take solace in the fact that there is an end in sight to this catastrophic phase.
So, where do we go from here? How do we make things better for ourselves? To quote Khalil Gibran, Progress lies not in enhancing what is, but in advancing toward what will be. Instead of complaining and fretting over things we cannot change, let’s plan on what can do to better prepare ourselves for the future. Here's what I would recommend:
Analyze your investment portfolio – Trailing return of S&P 500 for the first quarter of 2020 was -19.60%. Individual investors all across the board suffered significant losses in their investment portfolios. Those who were well diversified and had low systemic risk in their portfolios in comparison to the market as a whole, were able to better shield themselves from market volatility. The fundamental principle of constructing an investment portfolio is that it should be in alignment with your individual financial goals, risk tolerance, time horizon and liquidity needs. In addition to that, it is imperative to adjust the asset allocation in your portfolio to optimally position it at the appropriate level of systemic risk, based on the current and foreseeable economic cycle. It is crucial to keep an eye on economic indicators and position your portfolio accordingly, well in advance of the actual event. A good strategy is to start lowering the risk in your portfolio when the economic cycle is approaching it’s peak and to gradually increase the risk again towards the end of the recessionary stage. The ability to think ahead and stay objective are the two most important traits of a successful investor.
If you haven’t done so already, this would be the right time to conduct a detailed analysis of your existing investment portfolio. Make sure your portfolio is in alignment with your financial goals and risk tolerance. Take a closer look at your asset allocation, stock sectors and regions. Analyze the current level of risk in your portfolio, focusing on the portfolio’s Beta and Standard Deviation. Compare your return to a benchmark, such as S&P 500 or any other appropriate benchmark and understand why your portfolio performed the way it did in the current cycle. Check if your return was adequate for the level of risk in the portfolio. This insight will help you better prepare yourself for the next phase of the cycle. Ignoring these statistics and allowing yourself to be at the mercy of the market is not a great strategy for wealth building and capital preservation. Seek the help of a CERTIFIED FINANCIAL PLANNER™ if you are unable to analyze your portfolio on your own.
Revisit your financial plan- Your financial plan needs to be a living, breathing document that should be evaluated and modified periodically. It is important to evaluate how the current market downturn has affected your overall financial situation. You might need to make changes to your retirement planning if your savings rate or the overall size of your assets has changed significantly. This might mean making crucial decisions like postponing your retirement or cutting back on your expenses to reduce the risk of running out of money during your retirement period. These are tough decisions but ignoring the problem won’t make it go away. Face the truth and make a plan to deal with it.
Consider a ROTH conversion – In my opinion, current fiscal deficits could potentially lead to higher taxes in the future. If you are currently in a low tax bracket and your IRA portfolio has recently gone down in value, you might want to consider a ROTH conversion. Consult your Investment Advisor to discuss if this might be a good strategy for you.
Acquire new skills- My family is of Sindhi origin. Sindhi Hindus were forced to migrate to India amid the deadliest communal riots known to humankind, during the partition of India in 1947. My grandparents, who were affluent at that time, were looted, tortured and were forced out of their own home, penniless, with three young children in tow. The Indian government gave them shelter in a refugee camp in Mumbai. Life as they knew, had completely changed, and for no fault of their own. Their struggles were tough but with skill, hard work and enterprise, they finally got back on their feet. By the time I was born, my family had hired help for all domestic chores, and we lived a pretty comfortable life. Despite that, my grandmother insisted that I learn every skill that I might possibly need some day because, in her words, “You never know when times might change”. Since a very young age, I was trained to cook, sew, embroider, paint, speak six languages, handle finances, compete in a sport (I ran track and field), while also excelling academically. I sometimes resented being pushed beyond my limits but every time I wanted to give up, my grandmother would lovingly remind me that times can change without a warning and only your skill and hard work will help you pull through.
Life as we know it has changed for all of us, for no fault of our own. Our economy is currently in a contractionary phase and although I am optimistic we will recover from this phase, there will be a price to pay. We might see a restructuring of the economy, where certain jobs will be permanently lost, to be replaced by jobs in different sectors. These new jobs will require people to acquire new skills and go through additional training. This phase will lead to a further increase in structural unemployment, in addition to the already high cyclical unemployment. Be proactive and use this time to acquire new skills that will be relevant in the future. In my opinion, sectors like Technology, Biotech, Alternate Energy, Aerospace, Professional Caregiving, Medical Assisting and Building Infrastructure are going to see more growth and hiring in the future. Make sure you are well positioned and well skilled to take advantage of this restructured job market.
Be kind- Some of my fondest childhood memories revolve around my grandfather teaching me yoga, telling me stories about our ancestors and our family lineage, deciphering for me the deeper meaning behind the two major Sanskrit epics of ancient India, Ramayana and Mahabharata, and most importantly, demonstrating by his actions, the importance of being kind and charitable. In these stressful times, it is more important than ever to be kind to each other, starting with our families. Create a peaceful environment in your home, the ripple effect of which will be felt by the entire society. Be generous to those in need, keep paying your domestic help like your maids and gardeners even though they are currently unable to render their services. Little acts of kindness will go a long way in rebuilding the economy and help spread much needed joy and cheer in times of gloom.
Final tip – Stock up on good Scotch!