The economic crisis of 2020, spurred by the coronavirus pandemic and the fallout from social distancing, is unique among other historic financial downturns.
But we are moving into what can be a hazardous time of year.
October is a perilous month in financial history. The bank panic of 1907, stock market crash of 1929 and Black Monday in 1987 all happened or started in October. (Lehman Brothers filed for bankruptcy two weeks before October 2008, catalyzing the global financial crisis.)
The stock market has been roaring, with indexes even touching new highs, since recovering from the March pandemic-induced downturn, helping investors salvage some semblance of positive returns.
But trouble might lie ahead when federal aid programs continue to expire and assistance is decreased or not revived, providing a worrisome picture of just how much damage the economy is facing.
Credit defaults and bankruptcies are expected to increase, and as protections for tenants and landlords wind down, real estate values could be in for a correction.
As Pensions & Investments reported in its midyear outlook special report, economists cited the fourth quarter as one that will not be so positive for markets, given the potential for a second wave of COVID-19 over the winter plus other risks related to Brexit and the November U.S. presidential election.
The European Securities and Markets Authority earlier this month said in a trends, risks and vulnerabilities report that it "sees a prolonged period of risk to institutional and retail investors of further — possibly significant — market corrections and very high risks across the whole of ESMA's remit. ... The sustainability of the recent market rebound remains a concern."
And as the quarter ends, J.P. Morgan Chase said in a note reported last week by Bloomberg that pension and sovereign wealth funds are set to offload about $200 billion of equities as they rebalance their portfolios, posing a risk for global shares.
All of this is to say that investors need to be cautious. The past six months should have served as a valuable lesson in how to protect portfolios in the face of unexpected headwinds. The U.S. Federal Reserve on Sept. 16 held interest rates near zero and indicated they could stay at that level until 2023.
Now is the time to take the temperature on markets and position for what could be a longer-than-expected recovery. Even if a vaccine is approved and distributed in a relatively short time frame, it may take years for the destruction to the economy to fully recover.