When COVID-19 first seized in March, the stock market reacted almost instantly, falling into bearish territory for the first time in more than a decade. But stock values have rebounded well since then, to the point where you hardly think we are in a recession.
However, when we look at factors like unemployment, the numbers tell a very different story. In fact, it is due to rampant unemployment, among other economic factors, that lawmakers are currently in the process of debating a second stimulus package.
In March, the CARES Act was passed to provide COVID-19 relief, and it included a number of key provisions, including increasing unemployment and direct stimulus payments of $ 1,200 to eligible Americans. But the increase in unemployment will expire in late July, and many of those who received their cash stimulus earlier in the year have spent it. As such, Americans are desperate for additional relief, and if it isn’t done in a generous enough way, it could lead the stock market to yet another slump.
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Prepare for volatility
If you looked at the performance of the stock market in the past few months alone, you would hardly know that the country is dealing with a widespread financial crisis. But investors should not assume that the value of the shares will remain high forever. As we saw in March, the bad news on the COVID-19 front could easily cause stocks to plummet, and if a follow-up stimulus deal is overwhelmingly disappointing, the market could react similarly.
What would a disappointing stimulus agreement entail? For the millions of unemployed Americans, it means there will be no increase in unemployment or an increase that is much less substantial than the additional $ 600 per week that jobless people have been receiving in recent months.
And then there is the question of a direct stimulus check. Republican lawmakers initially rejected that idea, stating that direct aid was not necessary in light of the reopening of the economy. But recently, they’ve changed their tone, so it looks like there could be a second stimulus payment on the cards. But whether it is as generous as the first round has yet to be determined. Furthermore, there has been talk that a follow-up stimulus round will only target low-income Americans, leaving millions in the cold.
All of this could spell trouble for stocks, and investors need to be prepared for that. Of course, the best way to get through a period of turmoil after negative stimulus news is the same strategy worth employing, in general: sit back and don’t panic.
Over the course of July, COVID-19 cases have increased, and while that’s bad news financially and healthily, the stock market hasn’t reacted so badly. Even if there is a backlash after a less than stellar stimulus agreement, it can be relatively short-lived.
Still, investors would be wise to take advantage of that possibility, and set aside cash so that, if stock values fall temporarily, they can take advantage of the opportunity to benefit from that volatility rather than be affected by it.
