“The pace of recovery looks like it has slowed.”
—Jerome Powell, Chairman of the Federal Reserve, July 29, 2020
Last month’s Monthly Insight spoke briefly to our strategic general principals about the markets and investing. That short introduction was followed by a review of the first six months of 2020. One of the key takeaways from the mid-year review was the sheer unknowability of the short- to intermediate-term market moves and economic productivity. Clearly, much of the economic data at that time was extremely negative, with record declines in employment and consumer spending.
The COVID-19 pandemic continues to dominate nearly every aspect of life. Some states are seeing the number of reported cases soar and have considered and/or enacted partial lockdowns. Throughout July, several companies made announcements of progress toward either treatment or a vaccine. States and local communities struggle with plans to get students back to school.
Now we know we are in a recession, according to criteria set by the National Bureau of Economic Research. The NBER is the official arbiter of recessions and expansions. The prior expansion, which began in 2009, officially peaked in February, having lasted a record 128 months. In making its determination, the NBER concluded, “The unprecedented magnitude of the decline in employment and production…warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”
Forecasting in today’s environment
In his testimony before House committee on June 30, Fed Chief Powell said, “Many businesses are opening their doors, hiring is picking up, and spending is increasing. Employment moved higher, and consumer spending rebounded strongly in May. We have entered an important new phase and have done so sooner than expected.”
But he also recognized the need to keep the virus in check. “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities,” Powell added.
U.S. Treasury Secretary Steven Mnuchin took a more optimistic tone in his testimony with Powell. “The Blue Chip Report is forecasting that our GDP will grow by 17% annualized in the third quarter, and by 9% in the fourth quarter,” which follows a record contraction of 33% in the second quarter. Mnuchin also said he expects significant progress on the employment front.
Last week, Powell said, “The path of the economy is going to depend to a very high extent on the course of the virus, on the measures that we take to keep it in check. That is just a very fundamental fact about our economy right now.”
We are now half a year into the coronavirus pandemic. We have entered into a recession and have watched the markets drop by one third. We are tired. We have missed out on weddings, proms, vacations, daily routines, birthdays, and funerals of friends and family members. All of this hurts. It takes a toll. At times, we feel helpless and afraid.
There are many healthy actions we could take between now and Labor Day that might make us feel better. But making big portfolio changes is not one of them. Stay the course. Don’t make knee-jerk reactions. As Daniel Kahneman, the first psychologist to win the Nobel Prize in Economics, said, “All of us would be better investors if we just made fewer decisions.”