2020 is halfway over, and I hate to wish time away, but I think most folks are glad to see it over with. Remarkably, with all the turmoil, the S&P 500 closed out the first half with a loss of only about 3%, so if you had been backpacking through Europe with no access to news, you may have been surprised to see the S&P 500 nearly flat, but you’d have missed out on a lot in between, to say the least!
In reality, the small loss in the S&P 500 belies the damage done to most of the market. If you took the equal-weighted S&P 500, it was down about 11%, meaning that the average stock in the S&P 500 was down about 11%. Small-cap stocks had one of their worst halves ever, down about 15% (the Russell 2000), and international stocks were down about 12% (the EAFE). So, if you were diversified away from the largest technology stocks, your portfolio may well be down 10-15%.
The second-quarter rebound was amazing, producing one of the greatest rebounds since the Great Depression. Interestingly, such rallies have usually led to even further increases, so just because the stock market rebounded so rapidly doesn’t mean it can’t go up even more.
We’ve made it through the initial COVID shock, and followed that up with massive monetary response to keep the economy’s wheels greased. Now, we’re measuring what the fiscal responses from the government will be. This could take a while, especially given that it is an election year, and I expect that the folks running for re-election might include some special interest packages into the proposals. I would think that the closer we get to Election Day, the more likely the chances are that we get more stimulus, depending on how the polls are looking. So, I’m expecting a rocky next few months.
Economic metrics are suggesting that the recovery process started in May and that recovery has been surprising, in a good way. Leading Economic Indicators have rebounded sharply, and the Federal Reserve has embarked upon more bond buying, this time to include corporate bonds, as well. Money market assets are at record levels, meaning that if there is an economic setback, there is cash available to help weather the storm. On top of that, the Raymond James Healthcare Policy Analyst, Chris Meekins, believes that the US will soon turn the corner on the COVID outbreak, which would likely also help the economy.
Going forward, we’re certainly looking at COVID and the election as factors which could drive the stock market. We’re evaluating how to invest in this, and believe that we will construct portfolios to have two separate “silos.” One of these silos would contain stocks that are likely to do well should we not get the virus under control (work-at-home, food delivery, home cooking), and the other of which we think could succeed assuming the virus is controlled soon (retail, travel, leisure). We could well see a rotation out of technology, as the ratio between the sector’s performance and the broad market’s performance is the most lopsided since July of 2000. If you don’t recall, the NASDAQ 100 (comprised mainly of large technology stocks) fell nearly 80% over the following few years, so there is a precedent for underperformance of technology.
You may have heard discussion of “V”-shaped recoveries, “U”-shaped recoveries, and “W”-shaped recoveries. These refer to how the economy (or the stock market, depending on which is being referenced) will recover. So, will it be straight back up, resembling a ‘V” shape (straight down and straight back up), a “U” (down, followed by a slow period, then back up), or a “W” (down, then a partial recovery, then back down, before finally recovering)? I’d like to throw a different letter out there, a “K.” If it follows the “K” shape, we’d have had a rapid decline, followed by a period during which some businesses would recover to pre-COVID levels, and others would continue to lag, and possibly fail. This likely would be an acceleration of trends that had already started, like online retail and medical technology doing well, for example, while brick and mortar businesses struggle. This shape makes sense to me and will serve as a template for how we think about businesses and the economy.
Whatever the shape may be, we have a lot of confidence in our country’s ability to withstand this turmoil. Pessimism has rarely paid off, and we don’t think it will now, either. We always try to avoid unnecessary risk, and encourage you to use this recent rebound as an opportunity to consider how you have dealt with the volatility. If it didn’t bother you too much, or if you feel like you have plenty of time to recover from stock market setbacks, then you may well have figured your risk tolerance correctly. If you found the volatility too unsettling, you should reconsider your portfolio allocation. Either way, you have to keep your goals in mind, too. If you haven’t factored these into your portfolio, I encourage you to give us a call to discuss what role all of this plays in your financial plan.
In the meantime, I hope you stay safe and healthy. If you need to bounce some ideas –whether they be financial, vacation, healthcare, or Netflix binge-watching ideas- off of someone, feel free to give us a call. The Signature Wealth Strategies footprint includes 11 offices throughout the Carolinas and Kentucky, so we likely know someone you can speak with regarding those concerns and more.