Stay the Course with Personal Finances during Pandemic, Carey Expert Advises

Why is Wall Street going gangbusters during COVID-19 while Main Street shudders?

What is the long-term U.S. economic outlook if the pandemic and its impact drag on for another year or more?

Is a period of economic uncertainty a good time for investors to fiddle around with their stock portfolios?

Yuval Bar-Or, an associate professor at the Johns Hopkins Carey Business School with expertise in finance and wealth management, tackles these and other questions about both the broader economy and Americans’ personal finances in the following Q&A.

QUESTION: There seems to be a disconnect in the United States between business closures and high unemployment on one hand, and the robust stock market on the other. Could you explain why Wall Street can be doing so well while Main Street is floundering?

YUVAL BAR-OR: You can look at a number of factors:

• The main factor is that many stock market participants view COVID-19 as a temporary disruption and assume the massive job losses resulting from lockdowns will soon be reversed.
• The Federal Reserve has signaled that it will do “whatever it takes” to support financial markets. Investors interpret this as the Fed stating that it will bail out entire industries, if necessary, thereby reducing their perceived investing risk and encouraging stock price increases.
• Investors traditionally allocate some of their money to stocks and some to bonds. Record-low interest rates make bond investments unappealing. Many investors are investing money in stocks instead of bonds because bond yields are close to zero.
• We still have massive amounts of money flowing into stocks from automated retirement-plan contributions. These inflows help to prop up prices.
• Government policies are making borrowing very cheap. This easy money is finding its way to stock investments. It is also buoying other asset values, such as real estate.

Should we take comfort from the way the stock market is performing, or is there something a little puzzling, if not disturbing, about its strong performance in the face of so much financial hardship across the nation? 

A: It is premature to take comfort from recent market performance. Ultimately, the stock market cannot be decoupled from Main Street for an extended period. If economic activity and the employment picture worsen, that will translate into much higher personal and corporate bankruptcy rates. Demand for goods and services will plummet, and investors will be forced to revise longer-term corporate growth assumptions downward. Recent stock market performance is only justified if the worst of the COVID-19 economic impact is behind us and if employment picks up steadily.

What, if anything, would cause the numbers from Wall Street to start reflecting the misery in the rest of the economy?

A: Strong evidence that massive job losses are becoming permanent could cause the stock market to swoon. In addition, signs that key industries may suffer long-term damage could also contribute to market declines. The dining, hotel, live entertainment, and travel industries are all highly susceptible to prolonged COVID-related slowdowns. Significant economic damage to these industries, which have historically been relied upon to provide employment for millions of people, could drag down financial markets.

A focus of your work is providing financial guidance to doctors and other medical professionals. What does that guidance generally entail?

A: I provide financial literacy education to medical (and other) professional households. My guidance spans all the major areas of personal financial planning, from debt management and asset accumulation, to budgeting and insurance coverage, to investing and retirement planning. I also provide guidance on how to work with financial advisors, as well as how to reduce or even end reliance on them.

My initiative focuses only on education. No financial products are sold. This helps to avoid potential conflicts of interest.

Before COVID-19, the last major financial crisis was the Great Recession of 2007-2009. Is your advice to investors the same now as it was during that previous downturn? I.e., is there a financial playbook an investor would be wise to follow whenever the economy is badly shaken?

A: If you’re committed to a long-term passive investing strategy (as most of us should be), my advice remains the same: Stay the course! Don’t chase speculative investments. Continue to make your regular monthly contributions to retirement plans and maintain a focus on well-diversified, low-cost indexed funds.

This is the worst time to succumb to emotions and resort to impulsive actions. The key with passive strategies is to avoid trying to time the markets. You need to be invested, and your horizon is not next month or next year or even three years down the road, but 20 and 30 years in the future.

Remember that those friends who loudly announce all their “brilliant” trading decisions are self-censoring. They’re neglecting to tell you about all their failed trades.

Financial planning basics are not changing. You still need to have a strategic long-term plan, to make steady contributions to retirement accounts, to get employer matches into those accounts, to secure appropriate insurance coverage, to fund children’s college savings plans, to avoid biased or conflicted advice-givers, and generally to accumulate diversified assets.

This is a good time to take a close look at your household budget and slash unnecessary costs, freeing up more cash for shoring up cash reserves, paying down debt, or investing.

It is also a good time to take a closer look at your emergency cash fund and make sure it is sufficiently robust to cover your household needs, especially if you lose your job or suffer income reductions. A rule of thumb is to maintain cash holdings equivalent to six months’ salary. If you feel especially anxious, you can gradually set aside more cash. The simplest way to do this is to curtail some spending. This should be happening naturally as most travel and vacation plans are now impractical anyway, and traditional dining-out is less appealing.

If your plans called for a purchase of real estate, especially if it’s for a primary home, you can benefit from very low interest rates. The challenge could be selling your existing home. You should only take on major investments if you feel that your finances are stable and that you have job security. Taking on a large financial obligation (for example, a mortgage loan) and losing your job soon thereafter could be very difficult to overcome.

The effects of the 1918 influenza pandemic are generally considered to have lasted two years. Suppose we’re still dealing with the impact of COVID-19 well into 2022; are the U.S. economy and the stock market prepared to withstand such a long period of upheaval?

A: Five months into the crisis, we’re already seeing fracturing in some safety nets, with food pantries becoming overwhelmed and unemployment benefits decreasing. An additional two years of COVID-19 would mean far deeper misery, along with potentially millions of personal and corporate bankruptcies, with the latter concentrated among small and mid-sized companies. This will negatively impact employment and dampen demand for goods and services. Recovery from such a prolonged downturn will depend on government policies and the presence of safety nets that promote the survival of households (as economic units) and the corporate fabric of our economy.

Each of us can play a role as well. Many households are already experiencing difficulties with food and shelter. A prolonged downturn will be even more devastating for those less fortunate, who have few buffers of wealth to insulate them. Those of us who have jobs and the means should consider opening our hearts and wallets and supporting those less fortunate by contributing to nonprofits that provide food, shelter, and education. Even small contributions combine to make a huge difference.

Our donations won’t just help others. They will help us. The more we allow the economic fabric to unravel, the more likely it is that matters will get even worse and eventually drag us down as well. When economic circumstances deteriorate significantly, even “safe” jobs can be lost. The best outcome for everyone comes from collaborating to shore up safety nets (government and nongovernment). A united stand allows us to preserve more of our economic and social fabric and infrastructure, making an eventual recovery faster and easier for everyone.