Spend, Baby, Spend Just Came to an End

The global stock market has appeared to melt dramatically on the hopes for a COVID-19 virus and a resurgence of consumer spending. After big gains from the March 23, 2020 lows, we do not believe the stock market reflects reality yet, and there may be more pain. Markets are pricing a V-shaped recovery; everyone’s returning to work, and this is going to turn out fine. Happy days are here again, right. 

Quite frankly, at my firm, we don’t think it’s going to be that easy. There are at least two headwinds that have yet to be accounted for. First, a tariff war resurgence would be a direct hit to the market. Second, not looking at the pandemic, a second wave of company defaults could become particularly problematic. There may not be much of a recovery, which could mean that (NOMO) Not Missing Out investors are falling into a classic market trap that’s historically preceded a further meltdown. 

The pandemic has largely been isolated and neutralized because of all the monetary policy support that the Fed has provided. Another way to put it, The world’s central banks have thrown every kitchen sink into play they can put their hands on to forestall a recession, that may well be underway, and a depression. It may all turn out to be much ado about nothing. Not much different than bringing a water pistol to a super soaker thunderstorm fight.

Invesco’s Chief Global Market Strategist Kristina Hooper warned on Memorial Day the Coronavirus is not the biggest threat to the market. Hooper described on CNBC that flaring U.S.-China trade tensions potentially doing the most harm to stocks. Thanks to the Fed’s monetary policy support, the economy has been decoupled from the stock market. Hooper offered that “in late 2018 and 2019 tariff war was very, very problematic. It created a big headwind for stocks and a bigger headwind for the overall economy. That could be happening again this time around.”

Famed economist David Rosenberg described his bearish market prediction on Bloomberg TV early June highlighting, “the permanent loss of jobs, and overvalued market, a huge increase in savings, and blown out yield spreads.”

This is where everything gets interesting. The U.S. savings rate, however, soared to record heights as Americans hoarded more money than ever before, according to the New York Post, May 29, 2020.

The personal savings rate reached a record 33 percent in April, up from just 12.7 percent in March, the U.S. Bureau of Economic Analysis reported on May 29, 2020. The rate, which tracks how much people save as a percentage of their disposable income, is the highest since the department started tracking savings in the 1960s and nearly double the previous record of about 17 percent, set in 1975, from the same source.

Let go of the habit, Spend, baby, spend, America. Develop and maintain the habit of paying yourself first. Save no less than 10%-20% of every dollar you earn at the beginning of the month. Put your financial plan in place so that you know how much money you will need for 20-30 years after your last paycheck.

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