Spring 2020 Quarterly Newsletter
Author: Larry Carroll, CFP®
I initially wrote an article about revisiting your financial plan during this unprecedented bear market. However, after the market started to recover I decided to instead focus on what all of this stimulus will do for the economy in the long term. I still think it’s a good time to review your plan with your advisor because a financial plan should be able to weather the type of drawdown we experienced during the first quarter. I strongly believe that reexamining a plan during times of uncertainty is important because corrections allow us to think more clearly about the risk we are comfortable (or uncomfortable) taking in our portfolios. Securing your financial future comes into greater focus and examining the long-term plan in light of intense volatility is a worthwhile exercise that often provides comfort to investors.
Our government used stimulus in a truly new way to bolster the economy coming out of the 2008-2009 financial crisis. We saw QE1, QE2 and even QE infinity. There were varying opinions and concerns about the long-term effects of pushing so much liquidity into the financial markets. The recovery from the financial crisis was the slowest economic recovery since the Great Depression, but we did recover. Now more than a decade later, we are responding to the COVID-19 crisis with an even greater stimulus package.
The Federal Reserve, Congress and Treasury Department have worked together to send checks to individuals, create forgivable loans to small businesses, send stimulus money to specific troubled sectors and push liquidity into fixed income markets. The total price tag is over $4 trillion. I’d be lying if I said that I knew exactly what to expect, but I do have some ideas about specific responses to a few potential outcomes:
- National debt. I believe that higher levels of debt lead to slower growth. I also believe that as long as the economy starts the path to recovery that it will eventually recover. I expect a slow recovery, but I also have faith in America. I believe that we will get through this and eventually thrive. The alternative would be that the future is worse than the past. Believing in that denies the evidence of decades of growth and centuries of technological advancement.
- Future inflation. Inflation has stayed very low during the past decade despite the stimulus from the 2008-2009 financial crisis. If you want to protect yourself from inflation, take the advice of Jeremy Siegel who wrote “Stocks for the Long Run.” Siegel argues that the best inflation protection is to own stocks because over the last 200 years stocks have averaged a return of more than 7% above the rate of inflation. I would rather own stocks than gold or inflation-protected securities to outpace inflation in the long run.
- Interest rates. The 10-Year Treasury currently pays less than 1% per year. Unprecedented low rates have been one of the interesting trends in recent years. When the 10-Year Treasury pays 4%, I will start to consider the risks of higher interest rates.
I do not mean to say that there is nothing to worry about as consequences could present themselves. But our economy was facing a new threat. It was similar to a patient on the operating table going into cardiac arrest. When a doctor sees a patient on the table dying, his or her first priority is to save the patient and not worry about the side effects of the drugs that are administered. We did everything we could think of to save our patient and I believe that we succeeded. We will address the side effects if and when they arise.
This article was featured in our Spring 2020 Quarterly Newsletter available here:In the News, Market Update, Market Volatility