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 global lockdown put the economy in a type of “medically induced coma.”
In the US, the immediate effects were 1) a severe and instantaneous economic recession along with record unemployment and 2) the fastest, deepest collapse of stock prices in living memory. Footnotes: (3) & (4).
Normally, I write a personally summary of events annually. But this is an exception and I feel the need to comment on the past six months. This newsletter is divided into two parts. The first is a statement of general principles, especially those relevant to the current crisis, with a restatement of how I practice the stewardship of your invested wealth. The second portion is a review of what little can be known at this point and how I propose to deal with the pervasive uncertainties of the moment.
Part 1) General Principles
I believe that all lasting and successful investing is essentially goal-focused and planning-driven. Much failed investing is market-focused and event-driven. Put another way, wealth is built and maintained by a continuous process of following a long-term plan. Reacting to sudden and terrifying market shocks only enhances risk and rarely improves returns.
Long-term financial success is only incidentally a function of the economy and the markets while the short-term financial success is a direct function of investors actions or better stated lack of reaction to events. In other words, it is NOT how you act but how you REFUSE to react.
You and I are long-term, goal-focused investors acting on a plan with patience and discipline. Crafting the plan and revising as needed is the smaller part of my job. The larger part of my job is helping you to not react in stressful times like these.
I continue to believe that the equity markets (stock investments through mutual funds) cannot be consistently forecasted, much less timed, and the only certain way of capturing equities superior long-term returns is to sit through their occasionally steep but historically temporary declines.
2) Review and Outlook
At mid-year, the best that can be said in some parts of the world is that the worst of the virus seems to be over, while here in the US it remains to be seen when the virus will begin to abate, especially with continued irresponsible behavior of selfish people who ignore the medical experts. The economy is beginning to reopen slowly with the hopes that a second shut-down will not be necessary. The interaction between the pandemic and the economy in the short-to-immediate term is perfectly impossible to forecast, as is the timing of the development of a vaccine.
The stock market crashed from an all-time high on February 19 to a bear-market low (so far) on March 23, down 34% in 33 days. There is no historic precedent for this steep a drop in so short a time. Confoundingly, the stock market then posted the best 50 days in trading history. The S&P 500 closed out the first half of the year at 3,100, 8.4% below the all-time high. Footnote (1)
It is not possible to forecast the near-term course of corporate earnings or dividends, as they – like the economy they reflect – are still held hostage by the virus. That said, I call to your attention that as of the end of June the yield on the ten-year Treasury note was 0.66%. While at the same time, the dividend yield of the 500 companies that make up the S&P 500 is 1.92% Footnotes 1 & 2.
So while company earnings, dividends and share prices are impossible to forecast, it is difficult to accomplish financial goals with bonds at current prices and yields. This is another reason to continue to invest in companies (stocks) using the diversification of mutual funds.
Even when the pandemic and its effects subside and the economy recovers, investors will continue to have to deal with civil unrest not seen in this county since the Vietnam War and Civil Rights movement and a bitterly partisan presidential election cycle. Emotions seem likely to continue, with short-term market volatility. More comments in later newsletter regarding the elections and the stock market.
In summary, there is so much that is not only unknown but more importantly unknowable regarding the short- (through the third and probably fourth quarter of 2020) to intermediate- term (first two quarters of 2021) in terms of economic and market forecasts. I will remind you that not one of you is investing for the next four calendar quarters.
I say again that both you and I are long-term, goal-focused, planning-driven, patient and disciplined investors. Our focus is on history rather than headlines and our mantra is from Churchill: “The farther back you look, the farther forward you are likely to see.”
Finally, think back to January 1 of this year. Have any of your cherished lifetime financial priorities changed since then? If not, then I see no compelling reason to change your financial plan or make up of your portfolio.
Yes, the world is different today than yesterday and it will be different tomorrow. The only thing certain is change. But just as the darkness of night becomes the light of dawn and the cold rain of winter warms to spring and finally summer, this too shall pass. We all have the choice of optimism or pessimism. I choose optimism because to me, it remains the only long-term realism.
Thank you for taking the time to read this. Please feel free to call or email me with questions or concerns or even just to talk. Thank you for being my clients. It is a privilege to serve you and to be a part of you and your family’s life.
Make good choices. Stay safe. Even though on most days, someone is in the office, we are all still primarily working from home. My cell number is 760-518-8545 if you cannot get me at the office.
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