The COVID-19 pandemic is unprecedented in many ways and reminds us of the days in the 1990s when we used to hear Tom Carnegie's "it's a new track record" echo throughout the Indianapolis Motor Speedway. Economically-speaking, we've seen a lot of "new track records" recently, and not necessarily the good kind. April's unemployment claims have exceeded 5 million each week. Consumer sales dropped 8% in the month of March (and will likely fall by even more in April). The stock market has experienced dramatic daily and weekly swings, both positive and negative. Most recently, the price of oil futures contracts went negative, caused by a combination of weak economic activity and limited storage availability.
All of these "records" are a result of the unique economic situation in which we find ourselves. Nevertheless, the economy is expected to make a recovery (despite uncertainty surrounding the timing), and investments in stocks still offer the greatest opportunity for growth over the long term. While traditional economic data will likely continue to be negative for some time, it is helpful to pay attention to developments in other areas that also provide signals of the health of the economy.
Corporate bonds – the corporate bond market can be a good gauge for judging the health of many industries and companies. Corporate bond prices dropped in March when many bondholders were frantically selling their bonds to raise cash. Since then, liquidity in the bond market has improved. This is in large part due to actions by the Federal Reserve and its announcement that it will begin to purchase bonds. As a result of this improved liquidity, many corporate bond prices have recovered.
- Going forward, bonds are likely to be impacted more by the health of their underlying company and less by the liquidity concerns that impacted them in March.
- The health of the real estate industry, with so many loans tied to real estate, both commercial and residential, the ability of borrowers to pay their mortgages will be important to the health of the economy. Continued help from the government for small businesses and consumers will help both classes. Requiring or encouraging lenders to work with borrowers and offer forbearance or other payment plans will be important.
- Value of the dollar – A strong dollar can make it difficult for emerging market economies to meet their debt obligations, a significant portion of which is denominated in US dollars. A weaker dollar helps those countries while also making it easier to sell US goods overseas.
While the stock market gets the majority of the headlines, examining less followed areas of the markets is just as, if not more, important to understanding the direction of the economy. To this end, the Bedel Investment Team will continue to follow developments in these areas and provide you with periodic updates as necessary.
Please remember that past performance may not be indicative of future results. Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.
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