Imagine yourself at the beginning of the year. You have knowledge that within weeks a novel virus will emerge that will shut down much of the global economy. Businesses will close, sporting events will be canceled, your daily routine will be altered, travel plans will be derailed, and tens of millions of Americans will be thrown out of work.
This will turn into a health and economic crisis that virtually none of us alive has ever experienced. It sounds like a script created in a Hollywood studio. Yet, it’s the reality of 2020.
With the foreknowledge that a global pandemic and economic collapse is on the horizon, what decisions would you make to position your investment portfolio?
Many would have correctly anticipated a swift sell-off in stocks as the virus swept across the globe and the U.S economy went into hibernation. The safety of cash or long-term Treasury bonds would have been alluring. But consistently picking the peaks and valleys in stocks, or even something close, is a fruitless endeavor. Intuitively, we know this.
When might the investors who had fled to safety decide to repurchase equities, returning to the proper asset allocation designed to pursue their financial goals? Would the unending drumbeat of bearish sentiment have kept them out of the market and in the safety of cash or government bonds? For most investors, it’s difficult to pull the trigger when the news is bleak, and there’s no light at the end of a dark tunnel.
The swift sell-off in stocks is in the record books. It was violent but short-lived.
Strength in a few large technology stocks have helped fuel the rise in the S&P 500, while strong technology performance has fueled a spectacular advance this year in the NASDAQ.
Our country has experienced pandemics before but most of us don’t recall 50 and 100 years ago. There’s no playbook to model outcomes. The Fed, economists, and analysts are all learning as they go.
Blemishes remain on the economic landscape
Good news: the economy is in recovery mode, but it has been very uneven. We’re seeing a strong stock market, which has been supported by unprecedented liquidity supplied by the Fed, rock bottom interest rates, and an improvement in the overall economy.
Even though companies have been recalling furloughed workers, total employment remains well below the pre-Covid peak. The U.S economy has yet to reclaim even half of the 22.1 million jobs lost in just March and April (U.S. BLS through July).
It’s likely the economy will need to receive another shot of fiscal stimulus, but lawmakers are at currently at an impasse.
Final thoughts
We remain incredibly bullish on the long-term prospects for the U.S. economy, but we are monitoring short-term risks.
Outsized gains in a few technology shares leave the market vulnerable to a pullback. When we see stocks priced at higher valuations, unexpected surprises can create volatility.
The path of the virus remains top of mind. Fortunately, the mid-summer spike in cases has subsided (Johns Hopkins). Yet, could we see a second wave in the fall or winter? Might we see a resurgence in the virus amid the reopening of schools? What if the massive effort to develop a vaccine comes up short?
The election is barely two months away, which could create headline risk. Or, might tensions between the U.S. and China generate waves in the market?
While markets don’t always get it right, they attempt to price in the future and they are forward looking mechanisms. Markets are made up of millions of investors that have a financial stake in their decisions. Current price action suggests the economy will continue to improve, though the pace of improvement is uncertain.
As we mentioned in recent emails, the economy may not be the same when the pandemic is behind us, but we are a resilient people, we will persevere, and we will adapt.
September 2020
