First Priority: Save the Patient

June 10, 2020

 


We initially wrote an article about revisiting your financial plan during this unprecedented stock market volatility. However, now that the market has recovered significantly, we decided to instead focus on what all of this stimulus could do for the economy in the long term. We 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. We strongly believe that reexamining a plan during times of uncertainty is important because market 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 responded 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, with talks of even more stimulus to come. Warren Buffett recently said, “QE (Quantitative Easing) is like watching a good movie, I don’t know how it will end.”  We’d be lying if we said that we knew exactly what to expect, but we do have some ideas about specific responses to a few potential outcomes:


1. National Debt. We believe that higher levels of debt lead to slower future growth. We believe that is true for our economy and also true for your household.  We also believe that as long as the economy starts the path to recovery that it will eventually recover. We expect a slow recovery, but we also have faith in America. We 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.

 

2. 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. We believe that inflation could eventually be a problem but we don’t believe it will be a problem soon. It is difficult (but not impossible) to have high unemployment and high inflation at the same time.

 

3. Rising 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 moves back above 2 or 3%, we will start to consider the risks of higher interest rates.  In other words, we are not that concerned about rising rates over the near term.

We do not mean to say that all this stimulus 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. We will address the side effects if and when they arise.

 

Bottom Line: We believe that the bipartisan action of our government and the Federal Reserve, while extreme, were necessary.  We will do our best to keep you informed about the side effects if and when they arise. 

 

Please do not hesitate to contact us if you want to discuss the markets, your account, or most importantly, your long-term plan.

 

Regards,

Lyn

 

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