The third decade of the 21st century started out with a vigorous economy, record low unemployment levels and benign inflation. But late in the first quarter over the span of two weeks, investors faced the fastest stock market correction in history.
With an unpredictable assailant like a global virus, short-term actions by Congress and the Federal Reserve will need time to see if they are effective. Ultimately, the fate of the U.S. and global economies, which in turn will impact the investment markets, are dependent on how long the COVID-19 outbreak continues and if there is a second wave. Clearly, both supply and demand have been dramatically reduced, with a ripple effect on companies, workers, consumers and investors. Once the crisis has passed, we will learn which sectors, industries and individual companies remain financially viable with a business model built to sustain this unprecedented economic fallout.
Amid this backdrop, wealth managers must read the tea leaves to anticipate what the investment markets will look like post-coronavirus. The challenge is how to best position assets to take advantage of future gains without giving up ground now and turning paper losses into permanent shortfalls.
For individual investors, it comes down to what you want to accomplish in the next decade – or what your money can accomplish for you. Are you nearing retirement? Will you remain in the accumulation phase, wherein you can afford to take on market risk? Are you just starting out, and are you risk-averse due to the two major economic declines experienced in your relatively short life, or are you prepared to invest in future prospects – wherever they may lie?
Anyone already in or nearing retirement would do well to invest for a steady stream of income. While the DJIA initially took a beating, many blue-chip stalwarts continue to grow and pay out dividends as they have long term, through thick and thin. However, pay attention here, as there are some long-standing dividend paying companies that are starting to suspend or substantially cut dividend payments.
Growth-oriented investors would do well to look at companies that were well-positioned to survive the pandemic, because they may well represent commerce of the future. This includes the well-established FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), which have become masters of fast and reliable delivery of online content and physical delivery of essential and discretionary products. Unfortunately, the stock prices of these companies has soared in recent years, so it’s time to consider what the “next big thing” in this arena will look like and who are the frontrunners.
With that in mind, take a look at 2020 demographics. Millennials recently surpassed Baby Boomers as the largest generation in the United States, but they aren’t expected to hold this mantle for long. Generation Z/Centennials are on track to enter the workforce in higher numbers during the next decade. This is a generation that has never known life without cell phones and the internet, so expect the technology sector to ramp up not just with consumer innovations, but with ways to help other industries enhance data management, blockchain supply chains and artificial intelligence – which might become as omnipresent as retail strip malls.
In a post-pandemic world, employers seeking to strengthen their business models might come to embrace the idea of foregoing healthcare and other expensive benefits offered to employees. A subsequent world of higher pay and more public options could spur the growth of entrepreneurship and new small businesses. By taking advantage of remote employees, low overhead expenses and emerging technologies, smaller companies or conglomerates might be able to compete with the likes of Amazon in both domestic and global markets.
As a short-term precaution, consider how you might defend your portfolio against the possibility of inflation as we stumble out of the pandemic economy. The federal government’s generous stimulus packages combined with continued easing of monetary policy by the Federal Reserve could lead the United States to higher inflation. This could be exacerbated by the recent shutdown of production in many industries; the initial low supply of products also might contribute to price escalation. During this interim, investors may want to consider investing in commodities and Treasury Inflation-Protected Securities for inflation protection.
As always, it’s best to seek the advice of a professional in this ever-changing environment.