The second quarter of 2020 is unlike any other. We’ve been in the midst of a global pandemic that led to the “stay-at-home” mandates that caused a sharp, deep recession and left nearly 20% of Americans unemployed1.
In May and early June, after many thought the curve of new coronavirus cases had been successfully flattened, economic reopening occurred across the country. However, within weeks the virus spread and the US entered the July 4th weekend reporting record numbers.
With some progress reportedly being made on several treatments and potential vaccines, many people have started pricing risk assets as if the worst of impact from COVID-19 is over. This was before the onset of what many are calling the “2nd wave” of new coronavirus cases, causing many to question the pace of any economic recovery.
With expectations that the Federal Reserve will do “whatever it takes” to support the economy and risk assets investor attention has turned to Congress, as the $600 weekly unemployment benefit has ended. The passage of another fiscal stimulus bill is an uncertainty entering Q3, but one that is increasingly likely.
What can you do in the face of uncertainty?
1. Understand and Prepare for Risk
Take a hard look at your portfolio, and make sure that you understand your risks for the second half of the year, and into 2021. This volatility we are seeing – and have been seeing since late February, is very likely to continue, and your portfolio could gain or lose very rapidly. Make sure that you’re comfortable enough with your strategy over the next 6-months to a year so that you’ll be positioned for success. In the event that a vaccine becomes available in the second half of the year, we may see a significant upside, as that it is likely to speed economic recovery. But, barring that, you’ll probably see the markets end sideways for the year – lots of ups and downs, but no real movement.
2. Protect Portfolio Income
The second thing to consider is that dividends and income are more important than ever to help you generate income and stabilize your portfolio. But you have to be careful and very selective. According to Kiplinger, there are already 24 companies who have either cut or suspended their dividends this year, and it’s likely that more will follow. Across all U.S. markets, common dividend payments were $42.5 billion lower than they were in the year-ago period.
So, think about your portfolio in these terms, and make sure that you’re investing in companies that have sustainable dividends. There are companies actually increasing their dividends, and so it may make sense to make some changes in your portfolio.
3. Control Your Emotions
Finally, but not least importantly, think about some strategies to help you prepare and weather this storm emotionally. It can be difficult to stay calm when your portfolio is all over the place, and it can be easy to fixate on losses rather than gains.
There’s been a significant amount of research that tells us most people are more likely to avoid losses than to seek gains. This phenomenon is known as “loss aversion.” It means that most of us, all things being equal, will prioritize not losing $100 rather than gaining $1,000.
We suffer these feelings most strongly when uncertainty is highest – and there has been an unusually high level of uncertainty this year, which will no doubt continue. And the best antidote for this is experienced and to remain calm. That’s not to say simply ride it out – sometimes, there are actions that you should take, and you have to make sure that you and your advisor are proactive – not reactive – in times like these.
1Factset, accessed 7.8.20.