Emerging from the pandemic


David Joy, Chief Market Strategist, Ameriprise Financial

Woman review charts on computer screens in high-rise building

Key Points

  • The coronavirus pandemic took a substantial toll on the nation’s health and economy.
  • Unprecedented fiscal and monetary stimulus by the federal government helped steady the markets, but the future remains uncertain.
  • Eventually the economy should recover, and this is a vital time to consult with your advisor to make sure today’s realities match your risk tolerance and need for cash.

The U.S. federal government’s social distancing guidelines expired April 30th, paving the way for state governments to decide how to reopen. Beginning May 1, more than half the states were in various stages of reopening. Other states continued to impose stay-at-home directives to mitigate COVID-19.

Since the U.S. economy came to a standstill in March, almost 40 million Americans have lost their jobs. In the first quarter, the economy declined the most since the end of the 2007-2008 financial crisis.1 The slowdown is expected to be far worse in the second quarter. Consumers are worried, and the desire to get back to work is palpable.

Market direction depends on a list of unknowns

After plunging 34% between February 19 and March 23, stocks have staged a powerful comeback.2 Stock prices are not back to previous highs, but the rally has been impressive nonetheless as markets have responded to the massive fiscal and monetary stimulus.

Investors understand that economic data immediately ahead will be bad. But they appear to be looking beyond it, expecting a slow recovery to begin in the third quarter. That viewpoint is consistent with our own economic forecast. Stocks also received a boost from early evidence of the efficacy of COVID-19 drugs in clinical trials.

In the near-term, the direction of stock prices may depend on answers to several questions:

  • First, what is the risk of a reacceleration in virus infections as businesses reopen, and what would it mean for the U.S. economy? Would we need to shut down again? Epidemiologists say this is a real possibility. The rally in stocks seems to dismiss this as a likely scenario. It could also presume the quick development of therapies or vaccines.

  • Second, even assuming there is no second wave of infections and a slow recovery begins in the third quarter, has the rally left stocks overvalued relative to expected earnings growth? What that earnings growth will be entails significant guesswork, as forward visibility is limited.

  • Third, how robust will the recovery be, and how quickly will jobs be restored? It remains to be seen whether the pandemic has altered consumer spending and behavior. How soon will people feel comfortable dining in a restaurant, taking a cruise, staying in a hotel, or flying in a plane? Will they be more reluctant to make big ticket purchases, preferring instead to save their money?

  • Finally, if the recovery is slow to gather momentum beyond the second half of the year, are stocks prices too optimistic? So far, there has been no retest of lower prices. That is not inevitable, but history shows that after robust relief rallies it happens more often than not.

Reassess what the new realities mean for your financial objectives

Investors who have the luxury of time on their side can afford to focus on the longer-term. How quickly the economy gets back on its feet is not clear at this point, but in the meantime, speak with your Ameriprise advisor if you have questions or concerns. Your advisor is committed to helping you keep your portfolio structure well diversified and aligned to your goals and risk tolerance.

 

1 Bureau of Economic Analysis, May 28, 2020

2 Bloomberg.com, April 7, 2020