Bungee Cord Economy: Will YOUR Finances Snap Back?
Covid-19 has wreaked havoc across the world. What started as a health pandemic quickly became a financial pandemic and now the two are intertwined. There was some hope that measures, including state and city lockdowns and simple instructions for individuals, like washing hands, wearing masks, and maintaining social distancing would help quell the virus. But with single day cases on the rise in parts of the United States, it is clear that Covid-19 is here to stay in 2020. What does that mean for the second half of the year? And more importantly, how should you prepare for another six months living amid the dual threat of a health and financial pandemic? Let’s start with the big picture on where things stand.
U.S. Economy: The longest expansion in U.S. history came to a screeching halt in February, kicking off a sharp and steep contraction. First quarter growth contracted by 5 percent on an annualized basis and the second quarter is likely to be much worse, with predictions for a 20 percent drop. It had looked like there were “green shoots” in May and early June, leading some to proclaim that we were snapping back and a V-shaped recovery was here.
Not so fast, says Diane Swonk, Chief Economist at Grant Thornton: “Efforts to hasten reopening before guidelines recommended by the CDC have virtually guaranteed a slower recovery as infections are picking up again, that acts as its own tax on economic activity.” While the second half should pick up, most economists believe that the economy will be 5 to 8 percent smaller by the end of the year, than it was in January.
Labor Market: A staggering 14.6 million jobs have vanished since the pandemic started, which includes the 7.5 million jobs added in May and June; and the unemployment rate finished the first half of the year at 11.1 percent. Under normal times, that rate would seem awful, but in the pandemic, it is seen as a great improvement from April’s 14.7 percent.
The labor market is slowly climbing out of a giant hole, but it is unknown how the recent slowing of re-openings will impact hiring. Additionally, as state and local municipalities struggle under buckling budget deficits due to a spike in spending and much lower tax receipts, many municipal workers are bracing for furloughs and layoffs, as official try to balance budgets.
Federal Reserve: The U.S. central bank acted swiftly, slashing interest rates to zero. According to predictions by Fed officials, zero will be our hero for another two years, yes, years. Additionally, the Fed continues to be the lender of last resort, making trillions of dollars available to purchase assets.
Government Spending: The CARES Act has provided $4 trillion dollars worth of help to individuals in the form of Economic Impact Payments and beefed unemployment benefits, which add $600 per week to sidelined workers. The plan also included relief for businesses, both large and small. When Congress returns from its Independence Day break, it will get back to the negotiating table to provide more disaster relief. The outcome of those talks will be critical to the more than 30 million Americans who will see that extra $600 per week benefit vanish at the end of July.
Stock Markets: The pandemic impact on stocks has been like jumping off a cliff attached to a bungee cord. It took less than 6 weeks to end the longest bull market on record, when U.S. stocks lost 35% of their value and hit the bear market bottom on March 23. Since then, there has been a 40 percent increase. The gains of the past three months were the best quarterly results in two decades. With interest rates at zero, and few compelling alternatives, investors have bet that even if the economy were to falter this summer, money will continue to flow from Congress and the Fed.
Before you break out the celebratory Dow 30K hats, pay attention to this warning from the normally sanguine Bill McBride of Calculated Risk: “even with another round of disaster relief, it seems likely the recovery will stall unless progress is made in slowing the spread of the virus. The longer the widespread pandemic continues, the more structural damage to the economy. And the more severe the economic damage, the longer it will take to recover from the pandemic.”
With all of this being said, what should you be doing with your money? I went back to my January post to see if my pre-pandemic advice holds. Thankfully, it does, though I have updated aspects of these goals to reflect the pandemic economy.
Goal #1: Track Cash Flow
There’s nothing like a crisis to highlight a critical aspect of financial planning: understanding how much money is coming into your household and the amount that you spend. I know it may sound simple, but if you don’t get this core concept right, it’s hard to make informed decisions about your financial life. To track your cash flow, download a free app like Mint or Clarity Money or use your bank’s app.
Goal #2: Put Your Money on Auto Pilot
With your trusted cash flow in hand, make your life easier by using technology to manage due dates on bills and to establish auto pay on available accounts. The idea is to synchronize payments for recurring bills when you receive income. If you are paying down debt, establish automatic payments, even for a small amount, so your most important expenses get paid and you can avoid , or at least minimize, penalties and fees. If you are saving on your own, you can automatically transfer money from your checking or savings account to a Roth or Traditional IRA.
Goal #3 Embrace the Unthinkable
Nobody wants to think about illness and death, but the pandemic has made those topics a top of mind reality. Overcome the anxieties associated with this emotional topic and take control. You need to create (or update) a will, a health care proxy, which allows you to appoint someone to make health care decisions on your behalf if you lose the ability to do so, and a durable power of attorney, which allows you to appoint someone to act as your financial agent in a variety of circumstances.
Goal #4 Stop Trying to Time the Market
I have a friend who is a psychologist. She likes to offer this advice to her clients: Before you open your mouth, think of the word “WAIT”. In her world, that stands for “Why Am I Talking?” I would like to alter that acronym for those of you who were tempted to take action over the first half of the year. If you feel that itch to do something with your investment or retirement accounts, ask yourself, “Why Am I Trading?” Stick to your game plan, which should keep you out of trouble.