The economic shock created by the coronavirus pandemic poses challenges to households around the world. The way people saved and spent money is changing like never before.
Financial markets are the best place to look for shifts in risk sentiment. For instance, the stock market is viewed as a leading economic indicator, but also reflects a risk-on sentiment. It means that risk-averse investors are willing to take on additional risk for a bigger gain to compensate for that risk.
With that in mind, a quick look at the chart above tells us that investors have been selling equities towards the end. Moreover, they invested the proceeds into fixed-income and commodities, suggesting the flight to safety took place even when equities had one of their best months in decades.
The data suggests that most of the investors used the recent bounce in the stock market to liquidate positions and to reduce risk. When investing in commodities or fixed income assets, investors settle for a lower return, but a safer one.
People Withdrawing Money from Retirement Accounts
As always, the big question is, who exactly are these investors, and have they kept any capital out of the financial markets or invested it all in different assets? Like Gold and Bitcoin, which have been climbing in recent weeks.
A study by Deutsche Bank provides some insight into this. When asked if they withdrew money from retirement accounts in the last 60 days, over 30% of the respondents answered positively. It reflects the dire situation the public currently faces. For the typical investor, the retirement account is invested in a portfolio spread over various asset classes. In taking funds out of retirement accounts, people face additional fees, however they proceed nonetheless.
Moreover, if the economic situation continues to worsen, the percentage of people withdrawing money from their retirement accounts will likely grow. The longer it takes for the economy to recover from the coronavirus shock, the worse it will be for households around the world.
As central banks around the world print money to cope with the challenges ahead, the definition of risk changes. An old saying in the investing world is that when things go bad economically, the best solution is to buy bonds and wear diamonds. It reflects the oldest flight to safety concept that exists.
Right now, buying bonds and commodities is what investors did last April. Safety, as it appears, is not in the stock market.