Well, what happens now?
The global economy is currently experiencing the worst times any of us will have experienced. Massive unemployment on a global scale and the destruction of many business’s all over the world. Globally, we will experience one of the worst recessions ever and the media as usual are lapping up this negative news so we are surrounded by it. It sounds terrible. Yes, it sounds really, really bad..
But you should ignore it. Particularly if you’re an investor...
What does this data tell you that you don’t already know?
How can I say that you should ignore the worst economic slump we will hopefully ever witness? I mean, we’re in a recession, aren’t we? Isn’t that bad?
Well yes, we’d rather not be in an economic slump – but did you imagine that we weren’t?
As someone pointed out on Twitter yesterday, it’s not really surprising that "the economy dropped off a cliff when all the shops shut and people couldn’t get to work”. So all this news is telling you is something that you already knew. Basically, the economy has taken a big hit.
As to the epic, record scale of the drop this is not really surprising. If you actively seek to end all “non-essential” economic activity in the name of preventing the spread of a poorly understood but potentially lethal disease, then you have to expect economic activity to fall hard.
Indeed, if you wanted to be really contrary about it, you might argue that the depth of the downturn reflected the success of the anti-coronavirus lockdown. It shows that people complied with it.
So, why is this irrelevant for investors?
Surely this dreadful situation must be important for investors? I mean, it’s showing what an awful state the global economy is in. Haven’t we “plunged” into recession, as all the headlines say?
Well, no. All this data shows is that we were in recession in the first half of this year. And anyone who didn’t expect that, clearly wasn’t paying attention to all that coronavirus stuff that’s been going on.
Economic activity is picking up again now. China which was the first country to be hit by COVID and one of the earlier ones to move out of lockdown has seen its economy bounce back strongly.
This is why this data doesn’t matter much for investors as the information is historic. It’s a look at the past – and by market standards, the distant past. This is why the old data had barely any impact on markets, and rarely has.
By the time it arrives, we’ve already been through the period in question. Markets are forward-looking – if they haven’t already managed to have a good guess at what economic performance has been doing during the period in question, then they’re not doing their job.
So in short, it doesn’t matter what we had learned yesterday that 'the global economy is in recession' because ultimately, we and the markets already knew that.
But what happens now?
The more interesting question is what happens now. So far, the signs are that the global economy can and will rebound once countries come out of lockdown.
Does that mean it’s all sunshine and roses from here? Absolutely not. There are two
The first is unemployment – unemployment represents serious economic scar tissue. It damages individuals and it damages the economy and it’ll take a long time to get back to where we were. It’s going to take a while to get a handle on how this unfolds.
The other is the risk of a full-on second wave of the virus and how we would handle that. We have no real way of knowing – I’d assume that a full lockdown would be resisted as much as possible, but I’m guessing we won’t get a better idea until we see how the recent re-opening of the global economy impacts on cases.
However, the point is that we’re now in the phase where things are getting better rather than worse. The reality is that just as the headlines are all saying that we’ve “plunged” into recession, we’re already well on the way out.
And that’s why it’s old news that you can safely ignore.
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