Over 30 million Americans have filed for unemployment in the last four weeks. The stock market also had one of its best weeks in history and is up more than 25% from its lows.
What is the average investor supposed to think or do with this conflicting information?
There are two opposing forces in the market right now:
- The reality that the American economy has taken a huge economic hit due to COVID
- The government’s unprecedented spending of over $2.5+ trillion in stimulus
It seems the Fed learned their lesson in 2008 and this time they have flexed their muscles with 0% interest rates, $1200 payments to every American, and (most importantly) loans for businesses, banks, and states.
Make no mistake, the Federal Reserve has temporarily saved the stock market from the worst possible outcome.
Does that sound crazy? Take a look at this chart:
The stimulus package was announced April 9th*
The issue is that despite this spending, there will still be businesses that fail, there are cities and states that will go bankrupt, and there are Americans who will likely never recover.
The issue is that this is a bandaid on an economy that had already been showing signs of cracking and slowing down. It’s my opinion that the virus simply accelerated the collapse.
So I’ll ask again: What is any investor supposed to think or do with this information?
I’m going to share 2 principles I think will help:
- The first is to be selective.
This is not a situation where you invest in the general market. As I stated before, not every company will get through this pandemic.
Look for industries that will benefit from the lockdown versus those that will be hurt.
(Think streaming services versus movie theaters. Very few people are traveling and staying in hotels, but they are connecting on social media and working remotely.)
Look for companies that can rapidly adapt to the current environment.
(Chipotle’s stock was up 13% this week after they reported that deliveries are up 150% and 70% of their sales now come from online.)
2. The second is to consider how long it will take the economy to recover.
Will this be a quick V-shaped recovery with a strong 2nd half as businesses begin reopening?
Or will it be more U-shaped with the pickup in activity happening more gradually?
Or worst, will it be an L-shaped depression-like recovery with high unemployment and more outbreaks as social distancing is lifted?
No one knows for certain and the uncertainty is why the market seems indecisive. Is this just a temporary phase or is it the new normal?
After 10 years of growth, the American economy was forced to shut down almost overnight. The government has stepped up in a big way, yet it still seems like a deeper recession is inevitable.
Think critically about your investments. Will your favorite company still be here next year?
Retailers like Neiman and J Crew are getting ready to file for bankruptcy. Meanwhile, Apple is currently sitting on $192 billion in cash…
Like every financial crisis, there will be pain but there will also be opportunities for those who see the way the world is heading and prepare.
If you made it this far, thanks for reading! I hope this article helped make sense of some of the headlines you may have seen lately.
I also plan to be writing more on the topic in the next few weeks so stay tuned!
