The S&P 500 index has rallied more than 30% from its low on March 23—reinforcing the adage that it usually pays to stay invested over the long term instead of selling out during the dips.
Even with the recent uptick in the market, it is important to realize that the economy has quite a distance to go before it gets back to where it was at the beginning of the year. We remain cautious but optimistic.
The economy was shut down temporarily in response to the coronavirus pandemic. The market reacted by dropping precipitously, with the Dow Jones Industrial Average losing 10,000 points in a month. What started out as a medical concern became a financial crisis.
Those that felt the economic impact the most included people like restaurant workers, retail employees, barbers and hairstylists, and other similar modestly paid workers. Many small business owners found themselves unable to even open their shops because of a government edict. Investors felt the impact when they saw their investment portfolios decline sharply. Everyone has a financial pain threshold, and it becomes increasingly difficult to remember your long-term objectives when faced with increased levels of short-term pain.
The media focused on every bit of bad news. A seemingly endless streak of negative statistics were highlighted. There is no denying that shutting the economy down to reduce the spread of the infection had a massive economic impact. Unemployment shot up. Air travel and rail freight plummeted. Restaurants, theaters, hotels, convention centers and sports venues closed. Corporate revenues plummeted.
The government reacted by enacting the $3 trillion (with a T) dollar CARES Act that distributed relief checks to the vast majority of Americans. The same legislation distributed money to small businesses via the Payroll Protection Program to encourage small businesses to continue to keep people employed. There is talk about another round of stimulus – equally as large if not larger — to continue stimulating the economy.
We are not sure when or if the economy will resume its former track. There is a very fundamental reason why this economic drop is different from any other. This one was caused by a government decree based on medical fears rather than a structural economic problem. Government decrees can be reversed nearly as quickly as they were implemented. How the economy will react remains to be seen. There will undoubtedly be lingering aftereffects. But the stock market is a leading economic indicator. The rapid recovery of the stock market thus far indicates that investors view the future with more optimism than the merchants of gloom.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.