What do you get when you combine a global pandemic, economic lockdowns and social unrest with a presidential election? 2020 has been a crazy year of unprecedented uncertainty in many facets of our daily lives. And yet, investment markets have rebounded remarkably from the fear and panic of March, exhibiting optimism about the future of the global economy.
Economic news in the first half of 2020 was historically bad. After a 3.4% decline in US GDP in the first quarter, GDP shrank at a record 33% annual rate in the second quarter. The rapid pace of decline caused by COVID-19 was a shock to a previously stable economy. Economists now expect third quarter growth to show an equally sharp increase in GDP near 30%, as lockdown restrictions eased and the virus death rates have declined. Full-year 2020 projections now suggest economic output will decline by low single digit rate for all of 2020 compared to 2019.
Despite the tremendous economic disruption, as human beings we are wired to do what is best for ourselves and our families. No matter what barriers are placed in front of us, we strive to overcome those obstacles. These “animal spirits,” as termed by John Maynard Keynes, impact our decision making in stressful times. Nowhere is this more evident than in the housing market. Even with all the uncertainty surrounding the virus, politics and the economy, the housing market outside our large cities is booming. Individuals and families are confident enough to make decisions to move to the suburbs and more rural areas for the benefit of their loved ones.
A strong housing market can be very positive for the greater economy. Many industries benefit when people move to new homes – mortgage and construction companies, furniture and appliance makers. Over time, stock prices tend to follow corporate earnings and earnings have been hit hard since the pandemic began in February. Earnings for the companies in the S&P 500 dropped 34% in the second quarter compared to the previous year. Unlike the expected rebound in GDP growth in the third quarter, analysts expect earnings to be down 20% compared to 2019. For the full year, earnings are predicted to be down 15%-20%.
While 2020 earnings will be down significantly on average, some stock indexes are already moving into or toward record high values. The rise in stock prices can be partially attributed to the US Federal Reserve Bank lowering the Fed Funds rate back down toward 0%. With money markets earning 0% and bond yields at record lows, the best potential to earn a respectable rate of return is to own Stocks.
The world is still struggling to overcome the worst global pandemic in over 100 years. Our initial reaction was to shut down economic activity in the hopes of slowing the spread of the virus. With a potential second wave in the next few months, governments are grappling with how to balance peoples’ health concerns with the need for economic activity. And that is what each of us individually is going through - how to balance our desire for normalcy with our fears of COVID-19.
As investors, we need to focus on our own financial plan and make sure we remain on track to reach our personal goals. There will always be unexpected obstacles that threaten to derail our future, but maintaining a long-term diversified approach to managing our investment assets has consistently proven to be a prudent strategy. Despite the hardships we have all endured in 2020, the housing and stock markets seem to be telling us that we will prevail over the virus and economic growth will return.
This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions.
©2020 Canby Financial Advisors