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What Happens When the Rubber Meets the Road?

August 2020 Commentary

The U.S. government has spent trillions of dollars over the last few months supporting the U.S. economy. Unlike any time in history, the coordination between the executive branch, legislative branch, U.S. Treasury and Federal Reserve quickly pumped significant amounts of liquidity into the system. For many Americans, this government lifeline meant the difference between floating above water and sinking into financial ruin.

The stimulus, never meant to be permanent, allowed the economy to regain its footing post the pandemic-fueled shutdowns. While debate over the next stimulus plan rages on it is important to examine the current health of the economic system with one question in mind: what happens when the stimulus ends?

Many Americans are on the Brink of Financial Ruin

I expect another trillion dollars of stimulus is coming because without full control over the virus the negative economic impacts will linger. While the pandemic impact is widespread it is unequally distributed throughout the U.S. Some sectors are more impacted than others as are some geographic regions. While many Americans have not experienced any change to their income (some actually saw an increase!), many Americans are also days or weeks away from financial ruin. Although imperfect, government support has provided a lifeline to those most severely impacted.

What Happens When the Stimulus Ends?

Ideally, when the stimulus ends the economy will have recovered enough to stand on its own. Those Americans temporarily out of work will have returned to their (or any) jobs, reinstating regular paychecks. However, as we are all witnessing, this pandemic is not going away easily and will have continued rolling impacts on the economy. The worst may be behind us, but a return to normality may take much longer. As such, further stimulus would lengthen the lifeline and give the country more time to control the virus. Without further action those millions of Americans on the brink may fall over the edge, creating cascading negative effects on the economy.

Election

As if 2020 did not already throw enough curveballs, the upcoming November election looks to be one of the most divisive elections in America's history. Given the situation, it is natural to expect significant market movements based on the election outcome. However, history suggests there is risk to over-emphasizing the election's importance.

Past market data supports our expectation for increased volatility over the coming months. But volatility is not one-sided; it is the absolute value of both upside and downside movement. Further, increased short-term volatility may not have any lasting impact on our long-term success, as long as we do not react irrationally. In other words, a rising tide lifts all boats, even those on the downside of a wave. To see a much deeper dive into the potential impacts of this year's election I highly recommend reading the recent research compiled by Allegiant's Senior Research Analyst, Will Geisdorf, CMT. One thing is for sure, the election will dominate conversations over the coming months.

S&P 500 Reaches New All-Time High

As we push forward through the second half of the year the S&P 500 is hitting new all-time highs once again. In the face of so much uncertainty, this seems like irrational exuberance. While that may be true, the U.S. is back into the dreaded TINA (There Is No Alternative) environment. With interest rates so low, and the absence of other reasonably attractive investment options, money will continue to find its way into the stock market. At some point the fundamentals will take over, but momentum trades like this could go on for a very long time before unwinding.

As we navigate the unprecedented events of 2020, rest assured that the shorter-term impacts on the economy and financial markets are very much a part of our long-term plans for financial success. This year it was a pandemic, but next year could present us with something completely different. Unexpected events are a normal and expected part of life. While we do not always know what the cause will be, we regularly stress test your portfolio for the temporary negative impacts from these events. Having navigated the market declines earlier this year our focus now turns to the next potential event with only one outcome in mind: your financial success.

If you would like to see more articles about the economy, financial markets, and wealth management topics, please browse our Features

Benjamin W. Jones, CFP®, AIF®
CERTIFIED FINANCIAL PLANNER™️
President, Chief Investment Officer, Principal 

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