Investors have been provided a world class macro and micro economics lesson in 2020. Only half way through the year, we’ve navigated the end of a stock market cycle, the introduction of a new global pandemic, a social justice uprising and misguided leadership from the President through it all. It kind of feels like the kids were left at home alone and the house is on fire. In panic, the natural reaction is often to first scream in fear. However, as creatures innately wired for survival, the next step is to dig deep for logic and find a way out of the fire.
In the first quarter of this year, we saw a 35% decline from the peak of the market in mid-February to the bottom in mid-March as measured by the Wilshire 5000 Total Market Index, the broadest measure of the US stock markets.[i] As of the second quarter close, the Wilshire 5000 made an amazing 41% recovery from the market low. However, that still leaves us down 4.6% from our starting market value in January 2020, or down 8.4% from the market high in February. The same story of Q1 losses, followed by a strong Q2 recovery but a net loss for the year resonates true not only in the US Large, Mid and Small cap indices, but also in the international, emerging markets, real estate and commodities indices.[ii] The bottom line is year-to-date losses are prevalent across most market sectors.
However, the technology heavy Nasdaq Composite Index which lost 30% during the late February Covid decline, recovered 47% from the market bottom in March through the end of Q2, and is one of the only indices to boast a gain year-to-date of 11%.
The bond market continues to sit at all-time lows. The 3-month, 6-month and 12-month Treasury bonds continue to offer a whopping 0.0% coupon rate, making the 30-year Treasury offering of 1.25% interesting, comparatively.[iii] Remember when we thought a 1-year, 2% CD rate was “too low” last year?
In June, the Bureau of Labor Statistics (BLS) noted an improvement over May as the unemployment rate declined to 11.1% or 17.8 million unemployed persons.[iv] BLS attributed the improvement to job gains in the retail, trade, education and health services sectors, amongst others. This was an improvement of 2.2% over May.
Finally, Covid-19 has wreaked havoc globally. Worldwide, there have been nearly 12 million confirmed cases of Covid-19, including over 500,000 deaths reported. The US has had approximately 3 million confirmed cases and over 130,000 deaths. On Tuesday July 7th, new Covid-19 cases in the US were growing by at least 5% in 37 states; a statistic likely diluted by limited testing availability.[v] In the face of Covid-19, the President has pulled the US out of the World Health Organization, cut future government funding for Covid-19 testing, and has taken steps to eliminate the Affordable Care Act which provides medical services to many Americans and unemployed persons who recently lost employer health plan benefits.
Many wonder what all these data points align to, like constellations in the sky that somehow tell both the past and the future at the same time. The truth is, everyone has an opinion, but no one truly knows where the stock market is headed.
The economy (interest rate, unemployment rate, etc.) is an indication of where we are now. However, the stock market is forward-looking and often indicates where analysts predict we will be in a matter of months. The problem is, no one can accurately predict what tomorrow will look like in these turbulent times. In April and May when the stock market surged, many anticipated the US would have a better handle on the spread of Covid-19 by late summer and we’d be preparing to reopen schools and go back to work. On that trajectory, the US would be in a rebuilding phase and by summer of 2021, Covid-19 would be in our rear-view mirror.
However, heading into July, Covid-19 cases are rising rather than falling and Dr. Anthony Fauci, White House health advisor, said daily new cases could rise from our current 60,000 per day to 100,000 new cases per day if the outbreak continues at its current pace. Then again, some news outlets report optimism that Pfizer reported encouraging trial results of an experimental Covid-19 vaccine, and Moderna noted they are on track to start Phase 3 of their Covid-19 vaccine study.
Oddly enough, despite all the unprecedented news and events, the conclusion is likely the same consistent message. We don’t know where the market is going next, but we do know that trying to accurately predict the market for an extended period of time is a losing battle. The most prudent strategy is to play a good defense without completely cashing out, which would lock in losses and eliminate any chance for recovery or growth. That means keeping fear and anger in check and investing in a manner that truly matches your risk tolerance. It was easy to be an aggressive growth investor when the market was booming. This market downturn might be an opportunity to reexamine your portfolio to ensure it is appropriate for the volatility, and possible opportunities, that lie ahead in the next six months to come.