Today I want to give a State of the Economy now that we are past mid year, in a year that has all of us scratching our heads as to what has happened and what will happen in the next half. Many of us have known family member or friends that have been sick, many of us have felt the effects of isolation and loneliness, and the hunger for connection is off the charts. I can relate to most of this.
The first six months of 2020 saw the advent of the worst global public health crisis in a century—since the 1918 influenza pandemic. In response, the world locked down, putting its economy into a kind of medically induced coma.
In this country, the immediate effects were (1) a savage and nearly instantaneous economic recession, accompanied by record unemployment, and (2) the fastest, deepest collapse in stock prices in living memory, if not ever.
We believe that all lastingly successful investing is essentially goal-focused and planning-driven. All failed investing is market-focused and event-driven.
Stated another way: every truly successful investor we have ever known was acting continuously on a long-term plan. Every failed investor we have known continually reacted to sudden and terrifying market shocks. Let that sink in.
We have found that long-term investing success is only incidentally a function of the economy and the markets. It is a direct function of how the investor reacts—or, how he/she refuses to react.
Here, we all are long-term, goal-focused equity investors, acting on our plan with patience and discipline. The smaller part of what we do for clients is the crafting of that plan. The much larger part is helping you not to react in stressful times like this year
We continue to believe that the equity market cannot be consistently forecast, much less timed, and that the only certain way of capturing equities’ superior long-term returns is to sit through their occasionally steep but historically temporary declines.
We have as a team however built financial strategies to help clients remove the emotion when they feel the urge to take the foot off the gas when the market is crazy, and for those that have cash on the sidelines that want to systematically invest in the market during these times. These strategies are designed to help us avoid the dangerous timing game, yet still follow a plan designed to increase the potential for better returns in the short and long term. By using these techniques our goal is to prevent our clients from making mistakes that could likely set them back 10 or more years.
Review & Outlook
At midyear, the best that can be said is that the first great wave of the pandemic appears to be abating, and the economy is slowly reopening. As it continues to reopen, there will inevitably be some flareup in new infections. The interaction between the pandemic and the economy in the short to intermediate term is therefore perfectly impossible to forecast, as is the timing of the development of a vaccine.
The equity market crashed from a new all-time high on February 19th to a bear market low (so far) on March 23, down 34% in 33 days. There is no historical precedent for this steep a decline in so little time. Confoundingly, it then posted its best 50 days in history. The S&P 500 closed out the first half around 8% off its all-time high on February 19, and down around 3% from the beginning of the year.
It is not possible to forecast the near-term course of corporate earnings or dividends, as they—like the economy they reflect— are still largely hostage to the pandemic. That said, we invite your attention to the fact that at June 30 the yield on the 10-year U.S. Treasury note was about 6 tenths of one percent (0.6%).
We infer from the current state of interest rates that though it is impossible to forecast equity earnings, dividends and prices, few if any of our clients can continue to advance toward the achievement of their long-term financial goals in bonds, at anything close to today’s yields. This is just another reason why I have advised you to stay the course in equities. Yes, there is a place for bonds as most of us do not have the risk tolerance to own 100% stocks, but this needs to be reviewed closely with your financial advisor.
Even if the pandemic continues to subside and the economy to recover, investors will still have to deal with what may be the most widespread civil unrest in our country in decades, and what promises to be a bitterly partisan presidential election cycle. Emotions seem likely to continue to run high, with unpredictable short-term market consequences.
It’s impossible to predict the short term (say, the third quarter of 2020) to intermediate term (through the first quarter of 2021) economic and market outlook. But not one of you is investing for the next one to four calendar quarters. We say again: we are all long-term, goal-focused, planning-driven, patient, disciplined investors. Our focus is on history rather than headlines, and our mantra is from Churchill: “The farther back you can look, the farther forward you are likely to see.”
Finally, we would urge you to think back to January 1 of this year. Have your most cherished lifetime financial goals changed since then? If not, we see no compelling reason to change your plan.
Be of good cheer. This too shall pass. Optimism remains, to us, the only long-term realism.
By all means, please be in touch with us with any and all questions and concerns. In the meantime, thank you—as always—for being our clients. It is a privilege to serve you.
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one’s entire investment. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.