The Hibernation Economy Starts to Wake

Volatility has been a hallmark of the markets in 2020, and that isn’t going to change for a while.After years of extremely low levels, this year volatility in stocks, bonds, gold and other investments soared to levels com-parable only to the financial crisis and a few other extreme periods. Traders and investors who depend on quantitative models to adjust their portfolios have been whipsawed by the sudden, extreme changes, according to a recent report from Bloomberg News.

You should expect that pattern to continue. Market and economic fundamentals have little influence on investment prices these days. We’re more dependent on science and the outlook regarding the coronavirus pandemic. When optimism rises about a fast resolution to the pandemic, markets in risky assets surge. When cold water is thrown on the optimistic case, investors sell risky assets. We’ve seen the pattern several times since February.Instead of trying to capture the short-term moves or identify turning points, we should focus on the likely long-term trends.

More and more, it looks like the economic recovery will be very slow and take a long time, absent development of a safe and effective vaccine.

More small businesses in the United States closed from February through April than during the entire financial crisis, and by a wide margin, according to a study from the National Bureau of Economic Research (NBER).

Overall, 22% of small businesses and 41% of black-owned businesses closed. In the financial crisis, only about 5% of small businesses closed. Though government orders to close businesses and restrict activities are being modified, there still are restrictions on many businesses.

More important than government actions are people’s choices and behavior. The data show that the recession began in February. That’s well before businesses were ordered to close. It means changes in individual and business behavior preceded government orders. The government was following the private sector.

The data likely will show the economy hit a bottom in April, and there was a big bounce from the bottom. Even after the bounce, however, the level of economic activity is well below January’s peak. Households increased saving and reduced spending dramatically during the hibernation. More than 40% of the government stimulus payments were used to increase savings or pay debt instead of being spent on goods and services.

I expect consumers will be slow to return to a number of activities and previous levels of spending. Businesses also are showing restraint. They are cutting dividends, postponing capital spending, canceling mergers,  reducing stock buybacks and taking other steps to conserve cash.Until science provides a breakthrough, the economy and markets will depend heavily on fiscal and monetary policy for support.

The Federal Reserve reacted quickly, and Fed Chairman Jerome Powell made clear that the U.S. central bank he leads will do all it can to ensure liquidity.Monetary policy isn’t enough. The fiscal measures so far have been significant. They replaced a lot of lost income and kept the economy from spiraling into a deflationary depression.But if the economic recovery is long and slow, more fiscal stimulus will be needed. Congress is in no hurry to launch additional stimulus, and some key leaders have said they aren’t sure they will support more stimulus.

Should Congress decide on more fiscal stimulus, that stimulus needs to be delivered more effectively to people and businesses who need to replace lost income.

There’s no reason at this point to let either the most bullish or most bearish arguments affect your portfolio decisions. Instead, expect high volatility as many investors drift from one extreme to the other.

I continue to recommend maintaining a margin of safety through a balanced portfolio that includes gold, preferred securities and key stock sectors.