After Covid-19 is under control, the economy will start growing again. Businesses will figure out how to grow, and new businesses will open. How fast this happens affects your careers, pensions, investments and retirement.
Economists describe V, U, J and W recoveries. Investors look for forward earnings to price investments like bonds, stocks, mergers, businesses and real estate.
‘V’ recovery assumes after a sharp drop, the market will quickly return to normal. This was the early market opinion, and you can see the quick rally that occurred.
‘U’ recovery assumes a longer period down, followed by fast growth. This assumption lowers the value of investments because of discounted future earning valuations.
‘J’ recovery (or Nike Swoosh) assumes after the drop, the recovery will be slow steady growth. The post 2008 recovery is an example where economic growth was only ~2% for several years.
‘W’ recovery is the scariest when the market rallies on hope after a steep drop, then bad news causes more steep market drops. The Great Depression is an example. Eventually economies return to growing, but this assumes bear market rallies follow by more bear market drops.
No one knows exactly how the economy will behave, and reading the news is confusing and misleading. Best can do is give opinions based on observations and research. As always “your mileage may vary”. Not an expert.
After the depth of this drop on the global economy, we are starting from a Much Smaller Global Economy. Most small and medium sized businesses are able to handle short periods of lower earnings, but not long earning breaks earning nothing. A good number of businesses will not reopen. Not good for business spending.
1 of 6 workers are now unemployed. They are not buying anything but necessary goods and services. When these businesses return they won’t need all their previous employees with less sales. Eventually most will find jobs, but not necessarily at the same salary. Drops of 10-30% are possible after extended periods of unemployment. Does not help consumer spending.
Business recovery will be different by industry. Hair stylists will lose income this year because we only need one haircut to recover. Travel like hotels, cruise ships and airlines are going to be low and slow for 2-5 years. Small luxuries like Starbucks, meals ordered in or eating restaurants will recover much faster. Delivery services will have continued growth. Oil and energy will start growing from a lower user base. Durable goods will be smaller for a longer period.
Real Estate is going to vary by market: Strong demand for low income housing and apartments. Condos and housing will have lower prices with less qualified buyers. Commercial real estate will have more retail vacancies and lower office space demand with the growth of work at home.
What to Do Now? Decided at my age to lower my exposure to stocks from 40% to 30% in my 401K and hold more money market (cash). Also reduced International Bonds 10% moving to Domestic Bonds to lower my risk. Did not move completely out of the market, but made slight adjustments until think stocks are a good investment again. Investing is easier when you have a long term strategy.
Pensions May be Cut due to low returns. Look at your spending and see what can be reduced or deferred until you know how this will affect you. Do you have assets you can sell you don’t need?
If your job is secure, the next year may be a good time to purchase a car or home. Major purchases are the most important decisions for your wealth.
I hope not to be laid off, but may have to change industries again. Time to update my LinkedIn profile and create a resume in case. Preparation will help if the time comes.
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