With COVID-19 having resulted in lockdowns across the world, and with fears of second and third waves of the virus causing even the limited reopenings that have occurred to pause, there’s a great deal of uncertainty about what the future of the US economy will look like. Will we have a U-shaped, V-shaped, or W-shaped recovery? Or will we even have a recovery at all?
The US economy is facing a crisis that could make 2008 look like a mere blip. Certainly the government response to the current recession has dwarfed the response in 2008, and it’s exacerbating many of the problems that resulted in the crisis we’re currently in. And with so much uncertainty surrounding the economy, investors will have a hard time determining which investments are still worth holding and which ones aren’t. Let’s take a look at six popular investment assets and see how they might perform over the next few years.
There are still a great deal of investors who think that cash is a great investment. A bird in the hand is worth two in the bush, after all, and having that cash on hand can come in handy. But over the long term, holding cash is a money-losing proposition due to inflation. And because the Federal Reserve has engaged in even more money creation than normal to combat the COVID recession, the US dollar will be even more devalued in the future than it is now.
There’s no telling when the Fed will stop its money creation, nor will we know when the federal government will stop trying to juice the economy with trillions of dollars of debt-financed stimulus spending. Holding cash temporarily to finance a large purchase or to keep it secure until you figure out how better to invest it isn’t a bad thing. But trusting in cash for long-term investments, especially for retirement, isn’t the best move.
2. Savings Accounts
We’ll distinguish savings accounts from other cash investments because they offer at least some nominal interest payments, versus checking accounts or stashing cash under the mattress. But gone are the days when savers could expect 2-3% annual interest payments. With interest rates once again near zero, the paltry interest rates that were being paid over the past decade have been reduced once again to near zero.
Don’t be surprised to see interest rates of about 0.10% being paid on savings accounts. That’s $100 in interest for every $100,000 you have deposited. Not only is that not enough to keep up with inflation, it almost isn’t worth keeping that much in your account. And with the Fed set to keep interest rates low in order to stimulate the economy, the outlook for interest rates on savings accounts is for them to remain ultra-low for years to come.
The biggest surprise of this recession is that, despite the fact that we’re officially in a recession, despite the fact that we’re facing a second recession, and despite the fact that millions of Americans are still not back at work, stock markets haven’t seemed to reflect any of that reality. Buoyed by naive young investors piling their stimulus checks into markets, billions of dollars of Federal Reserve stimulus, and hope of a miraculous COVID cure and immediate recovery, stock markets have remained stubbornly high.
But even the most optimistic investors have to face reality eventually, and the reality is that stock markets are long overdue for a correction. With corporate revenues falling due to weak business conditions and with the prospect for future growth at the mercy of governments and their dictates, there’s just no telling how much worse the US economy will get before it recovers.
In a worst case scenario, we could be facing a situation like the Great Depression, with years of economic malaise. Remember that it took 25 years for stock markets to get back to their 1929 levels. Can investors today afford to take that kind of risk by investing in stocks?
Bond markets aren’t much better today. Your choices are to invest in government bonds that pay almost nothing, with even the longest-dated bonds yielding less than the inflation rate, or to invest in corporate bonds that may get downgraded into junk status at any time.
Over the past 30+ years, more and more corporate debt has been issued, of lower and lower quality. The post-2008 era has seen an explosion in corporate debt issuance, with a massive corporate debt bubble resulting from a decade of abnormally low interest rates.
Like flies to honey, corporations flocked to debt markets, taking advantage of those low rates to issue bonds to fund stock buybacks. Now they’re having to pay the piper, with decreasing income being expected to cover massive debt loads. Many investors will find out the hard way that holding the bonds to blue chip companies that are now facing downgrades or bankruptcy wasn’t such a good idea. Until all that bad debt is shaken out of the market, the bond market will remain a minefield.
5. Real Estate
They’re not making any more land, so real estate must be a great investment, right? If you’re looking to buy land to build a house, start a farm, or do something that you enjoy, there’s probably nothing wrong in making that choice. But as an investment, real estate has always been fraught with speculation.
The housing market may not be the epicenter of the financial crisis like it was in 2008, but that doesn’t mean it isn’t being affected by the lockdowns. When you see surveys that indicate that half of American households are considering selling their house due to financial difficulty, you realize that things are dire.
Then there’s the commercial real estate market, which has been impacted severely by the lockdowns. Numerous corporate tenants such as department stores have stopped paying rent to landlords, impacting those firms’ operations. And even if those stores begin operating again, there’s no telling how well sales will recover and whether or not those stores will be able to cover their rent payments.
On the office side of commercial real estate, so many companies have realized that telecommuting is just as effective as a physical office that there will be an inevitable downsizing of many companies’ office footprints. Don’t be surprised to see vacancy rates in commercial office space climbing, and landlords having a harder time finding tenants. Due to lease terms, this trend may take a while to materialize, but you can bet that companies that have the option to reduce their office space are going to do so as soon as they have the opportunity.
One of the only assets to really shine this year has been gold. It recently pushed above $1,800 an ounce, and could very well set a new all-time high this year if the economy continues to deteriorate. Investors have trusted gold to protect their assets for centuries, as gold not only maintains a stable value over the long term, but it also performs well the worse the economy gets.
Many investors remember how gold tripled in value from 2008 to 2011, while stock markets couldn’t seem to gain any traction. With stock markets headed for a correction and the economy facing quite possibly its worst year since the Great Depression, more and more investors are choosing to invest in gold. And if the economy flounders over the next few years, don’t be surprised to see gold repeat its post-2008 performance.