How healthy are your finances, and how healthy are the finances of those around you? We all know that we are heavily influenced by those we choose to spend our time with, but even if you spend large amounts of time with your family and peers, can you make an accurate assessment? It probably feels like a layered, complex question, and it most likely pulls up some positive or negative emotions, but it also depends on a number of other factors. Are we comparing our finances to our parents, neighbors, or co-workers? Also, how can you tell? How can I tell? You could look at the car they’re driving, the home they are living in, or the clothes they choose to buy and wear. However, looking at buying behaviors is oftentimes misleading and maybe even more telling of the actual underlying condition. As a society, we are doing a great job putting on the persona we are winning with money. I mean, we live in an affluent nation with a high standard of living. Let’s be honest, though; we are much more emotionally driven when it comes to consumerism than we like to think.
If we are honest, many of us are more reactive than proactive with our finances. 2020 has proven to be a perfect case study for this. Although this year/virus is considered a black swan event, and we could not have legitimately prepared for it, we probably wouldn’t have changed a lot even if we did have the information we needed beforehand.
“The National Endowment for Financial Education (NEFE) finds that nearly nine in 10 (88 percent) Americans say the virus crisis is causing stress on their personal finances. More than half (54 percent) say they’re worried about not having enough saved, while almost half (48 percent) are concerned about their ability to pay bills. With recent news from the Department of Labor that one in 10 Americans is now seeking unemployment benefits, it’s clear that worry about job security could be escalating. The NEFE survey finds that 28 percent say they’re stressed over their job security. Three-quarters of Americans are taking steps to adjust their finances due to the outbreak. Two in five note they have cut expenses—26 percent are putting off major financial decisions, and 22 percent have increased contributions toward savings. Additionally, the outlook for personal finances a year from now is proportionately low.”
The data from NEFE was pulled before another wave of lockdowns this winter, but it shows where people’s minds go in a crisis. I, however, question where people’s minds go versus their actions. How many of these folks had great intentions of cutting back spending, saving more, and the like, but never did? CNBC recently combined data to show the Top 10 stressors among American adults in 2020. Surprise, surprise: all ten are financial metrics, and surprisingly, not one refers back to fear over personal health during this crisis. The greatest of these is having enough emergency savings.
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Although the 2020 layoffs and resulting unemployment, rising costs in goods, and the impact of social distancing and self-quarantining have undoubtedly impacted personal finances, I believe that there is more to the story. We have all heard the Warren Buffett quote, “Only when the tide goes out do you discover who’s been swimming naked.” But this could not be more true in the sense of most American’s personal finances. When the jobs leave, inflation sets in, and the economy contracts, you see how prepared we are to face these new challenges.
Knowing that the economic ups and downs are cyclical, we must prepare our personal finances for these cycles as well. However, during one of the most volatile years in recent history, people are behaving in an alarmingly optimistic manner. Although NEFE notes that more than a quarter of Americans are stating they are putting off large purchases, what are people cutting back on?
Some of this optimism may be coming from the amount of discussion around what has been called a U-shaped, V-shaped, and now K-shaped recovery (I really do hope this is what we end up seeing in retrospect). Although people are statistically feeling the stress of 2020, their behavior seems to paint a different picture. The S&P500 was up just over 15% from November 2019 to the same date range in 2020. The census covers seasonally adjusted figures for residential sales and construction, which shows residential sales being up a whopping 22.6% over October 2019. Building permits are up 2.8%, housing by 14.2%, and housing completions by 5.4%, respectively. While less impressive than the last report, this only seems to be gaining momentum at the moment.
https://www.census.gov/construction/nrs/pdf/newressales.pdf
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https://www.census.gov/construction/nrc/pdf/newresconst.pdf
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I highlight the housing sector because it fuels home furnishings, appliances, and renovations, but another major industry has experienced a year-over-year uptick. The auto industry saw a 6.1% increase in September 2020 over 2019. However, the year was brutal for the auto industry between factory shutdowns, fleet sales reductions, and inventory issues. Even amongst the tumultuous sales data, car manufacturers have continued to release high-profile projects, like Tesla’s Model Y, Land Rover’s Defender, and Chevrolet’s mid-engine Corvette, to name a few. In 2021, this does not seem to be slowing down either.
We are nearing all-time-highs, and the stock market buy-in, home, and vehicle sales have only accelerated.
We have experienced record unemployment, record forbearance, and a record number of those taking advantage of rent moratoriums across the nation. In spite of this, it seems like the low interest rates have trumped the uncertainty in people who are either feeding that uncertainty with spending or seeing it as a blip in the economy that will recover once the lockdowns are officially lifted.
With all of the fear in the markets, multiple shutdowns, an election year, and a number of other challenges in 2020, why would the stock market, housing, and vehicle purchases be performing the way they are? With all of the talk around a looming recession (and with very little talk around currently being in one), what areas of your finances are you “swimming naked?” If so many people are stressed about their financial position, the future, and cutting costs, why are we simply turning a blind eye to what’s around the turnpike?
We will be going through an in-depth look at financial seasons in an upcoming series.
