If you decided to take a long nap on New Year’s Eve and just woke up today, looked at your account statements, you might have yawned at how unchanged and boring the market must have been. You’d probably think, “on average, the market has been unchanged.”
But that’s the problem of averages when it comes to the stock market — they can wall-paper over a lot of painful experiences, like the tech bubble of 1999-2000, and the housing bubble of 2006-2007.
Considering the health catastrophe created by COVID-19, the strong rebound in stocks since the late-March low is astounding, especially given the deep economic damage. But given that the stock market is a forward-looking discount mechanism, it suggests that the collective wisdom of investors is more optimistic than the evidence that we hear and read about every day.
Stock markets continue to express little concern about the many uncertainties in this environment. Stock market valuations have met or exceeded their pre-crisis levels by most measures and continue to expand despite the major ongoing risks. Existing home sales in June of 4.7 million exceeded a record level on the back of falling interest rates, even as the number of unemployment claims ticked up last week for the first time in four months.
Federal Reserve support, rock bottom interest rates, the re-opening trade, and stronger economic data have helped. I also believe investors are looking past this year’s hit to corporate profits and are expecting an upturn in 2021.
The jump in daily COVID cases has created some renewed volatility, and it bears watching, but it has yet to knock the bulls off course. New all-time highs in the stock market in the weeks ahead would not surprise me one bit (the NASDAQ index has already done it). Even more surprising, it’s entirely possible that we’ve embarked on a new bull market.
While we are cautiously optimistic and giving this market the benefit of the doubt, we are maintaining our defensive allocation, primarily due to the persistent level of exuberance in the markets and resulting current overvaluation, as well as the uncertainty around possible rollbacks in re-openings.
Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds. Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach. It may take time for some businesses to fully recover. Some never will.
Last month I opined, “I don’t expect a return to a pre-Covid jobless rate anytime soon. But investors are betting that an economic bottom is in sight.”
Try to look past continued volatility. With elections coming up this year, I expect more wacky market moves to go along with the typical wacky political moves we always see in a presidential election year. Regardless, based on recent economic reports, I think we hit bottom in April.
Those worried about a return to the March lows currently don’t have much evidence in terms of stock market action to support their worries. With so much money on the sidelines, it seems that every little dip is getting bought by those left behind in the panic.
If you liken the February-March stock market crash to an earthquake, then sure, you may feel some tremors and aftershocks for months, but the likelihood of another earthquake within a short period of time is highly improbable.
What to Do
None of us expected an economic upheaval spawned by a health crisis as the year began. But it pays to discuss some of the lessons and takeaways from the COVID-19 crisis. And as I discuss them, you’ll probably recognize some of the themes (yes I do repeat myself frequently, like a nagging parent). Let’s not forget that the fundamentals—the core financial precepts—are always the building blocks of any credible financial plan.
1. Money at the end of your month
Saving for an emergency cannot be underestimated. Six to nine months of spending needs is optimal. But there is an added benefit—financial peace of mind.
It’s reflected in the proverb “The borrower is servant to the lender.” It’s not that I would counsel against a mortgage for a home or a reasonable loan for a car. But accumulation of wants (not needs) with (credit card) debt doesn’t bring contentment.
Instead, it brings stress. I have seen it over and over. You want money at the end of your month, not month at the end of your money.
A financial cushion eliminates one of life’s worries.
2. Wants vs. needs
Many of us have learned to do without certain things during quarantine. Whether we wanted to or not, we were forced to cut back on certain items.
Ask yourself this question, “As businesses re-open, are there things I can do without? Can I continue to cut back and still maintain my lifestyle?”
Many of our entertainment options have been curtailed. As we emerge from our homes and businesses reopen, are there items that can be trimmed from the budget?
It’s not a cold turkey approach, i.e. no more eating out, sporting events, travel or theater. But can we reduce expenditures on some items without sacrificing our overall lifestyle?
3. Diversification and tolerance for risk
We’ve just witnessed an unusual amount of stock market volatility. Calling it a roller coaster does not fully capture the experience (and most amusement parks are still shuttered!)
The major indexes have erased much of their losses. Yet, how did you fare emotionally when stocks took a beating? Now is the time to reevaluate your tolerance for risk. We’d be happy to assist and make any adjustments as they relate to your longer-term financial goals.
4. Expecting the unexpected
From its March 2009 low to the February 2020 high, the bull market ran for over 10 years (measured by the S&P 500 Index). We know bear markets are inevitable, but I recognize that the onset of a steep decline may be unnerving.
Nonetheless, a well-diversified portfolio of stocks has historically had an upside bias. That upside bias is incorporated into the recommendations we make, even as our recommendations are tailored to your individual circumstances and goals.
Further, a mix of fixed income and contra-funds helped cushion the decline. While we monitor events and the markets over a shorter-term period, let’s be careful not to take our eyes off your longer-term goals.
Be proactive, not reactive
The ideas above are a broad overview and individual circumstances may vary.
Taking inventory is critical. It’s half the battle. Be proactive, not reactive. You may find you are in a much better position than you realized. As always, we are here to help.
I hope you’ve found this review to be helpful and educational.
I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced. We have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.
If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.