How will your household finances fare if the stock market tanks sometime this year?
The stock market is not the economy. The major market indexes climbed to new highs even as millions of Americans lost their jobs or joined the ranks of the underemployed in 2020. The current consensus is that the economy will kick into higher gear by midyear, largely thanks to the distribution of coronavirus vaccines. Yet with the stock market at nosebleed levels, it wouldn't take much to send investors fleeing to the sidelines. Retirees, near-retirees and anyone else who depends or plans on relying on income generated by their retirement savings should take sensible risk-mitigating precautions — just in case.
My cautionary message is inspired by reading the latest viewpoint from Jeremy Grantham, the legendary value investor. Grantham is the longtime chief investment strategist at the Boston-based GMO, the money-management firm he co-founded in 1977. Grantham has been unusually prescient over his long career about major market shifts. That said, he is often early in his judgment calls. In "Waiting For the Last Dance: The Hazards of Asset Allocation in a Late-stage Major Bubble," Grantham argues investor enthusiasm has reached a speculative frenzy.
"The long, long bull market since 2009 has finally matured into a fully fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history," he writes. Among the speculative excesses he highlights are Tesla with a market capitalization of more than $600 billion, the blazing hot initial public offering market and the increasingly rapid rise of the major U.S. indexes over the past nine months.
Grantham is making a forecast, a hazardous endeavor. There are plenty of good counter arguments, too. Still, the threat is realistic enough that vulnerable households should see where they can limit their risks to a market meltdown.
The actions to consider if you are dependent on income from your portfolio aren't particularly difficult.
Among them: Set aside enough in cash to meet necessary expenses; get rid of credit card and other consumer debts; build a well-diversified portfolio; and, if employed, stay in touch with your network.
A handful of household risk-reducing steps will cut down on your financial stress if and when the bubble bursts.
Chris Farrell is senior economics contributor, "Marketplace," and Minnesota Public Radio.