No one knows precisely how the coronavirus pandemic will affect the United States economy, either in the coming months or in the long term. What we do know is that the number of new daily COVID-19 diagnoses in the country continues to rise, and is now nearly double what it was at its first peak in the United States in late April.
In response, some states are resetting their locks, while others are half-asking people to wear masks and social distance in hopes of containing the virus.
It is each state in itself, and that creates a lot of uncertainty for companies. National restaurant chains, for example, face different rules in each market, which can hinder their operation. Businesses in the travel, entertainment and retail sectors, among many others, face similar problems.
However, despite the almost endless torrent of bad news, the stock market has been resilient, even downright challenging. At some point, that is likely to change. But a market crash, although perhaps inevitable, will not be the disaster you may think.
A stock market crash seems likely. Image source: Getty Images.
Bear markets happen
The stock market plummeted in February and March, but rebounded largely due to optimism that the economy will recover quickly from the pandemic. This optimistic outlook has persisted among merchants despite the fact that the US coronavirus outbreak is worse than ever, and some states have delayed or reverted their reopening plans.
Widespread trade closings increase the risk of the market falling again soon, but that may not be the key factor triggering the next bear market. That triggering event could very well be the federal government allowing the enhanced unemployment benefits to expire.
Currently, thanks to the CARES Act, workers who collect unemployment earn an additional $ 600 per week in addition to the usual state benefits to which they would be entitled. That figure was chosen by Congress with the goal of keeping the average person’s income more or less the same as when they worked, but for many whose employers paid them low wages, it meant they were charging more in unemployment than they had previously done.
That added benefit is slated to disappear in late July, and Senate Republicans have shown little willingness to extend it. At that point, tens of millions of people will experience a sharp cut in income, and many will be left without enough cash to pay their bills. That could have a ripple effect on the entire retail landscape, causing more people (and businesses) not to pay rent. It will also be a severe blow to the already faltering restaurant industry, and indeed, almost any business that relies on consumer dollars.
While unemployment numbers have improved, more than 10% of Americans are still officially unemployed, an unemployment rate worse than what the US endured in the worst month of the Great Recession, and that number may begin to worsen before improving. By withdrawing the $ 600 a week from the improved unemployment payment, Washington could be unleashing an economic ripple effect that leads to another stock market crash.
Keep calm and invest in
The recent rebound in the market was surprisingly fast, probably due to the unique circumstances that triggered the slowdown.
Historically, the stock market has taken longer to recover from such declines. But eventually, it has always reached new heights again. If it crashes due to the economic impacts of the strengthening of the coronavirus pandemic, it simply is not known what will follow.
There could be another rapid rebound due to optimism, the discovery of effective treatment options with COVID-19, or the success of one or more of the many coronavirus vaccine candidates already in development. It’s also possible that a lack of those things will keep stock prices depressed for a longer period of time.
But again, what we do know is that the historical pattern in the US stock market is that the increases are eventually followed by bigger booms. You may not feel particularly comforting during a crash, but it’s important to have it on your head as you watch a sea of red numbers.
During a crash, take the opportunity to reevaluate each company in your portfolio. If you still believe in your investment thesis, a falling market is a good time to increase your positions.
Consider if anything has changed for the company in the long term. If you haven’t already and you expect a recovery and further growth, definitely wait and even buy more if you can. Just as important, don’t let fear or short-term market movement make you doubt your long-term investments.
