Stocks have staged quite a recovery since their depths in late March. In fact, the upside was so swift that a bull market recovery started within one week’s time. While stocks have had ups and downs since late March, they’ve generally been moving higher, which is somewhat surprising with so much of the world in lockdown, businesses closed and unemployment soaring. We take a look at why stocks are staging a bull market in a bear market environment.
Stocks Are Forward Looking
Perhaps the first place to start is explaining that the stock market almost always begins to recover well in advance of an economic rebound because stocks are forward looking. This means that stocks often fall before negative news about the economy is confirmed. Similarly, stocks often rebound well before an economic recovery is verified. We’ve certainly seen these many times in the past, and thus far during COVID-19. US stocks began to fall weeks before any restrictions were imposed in the US. Shortly thereafter, stocks started climbing in the wake of some of the highest unemployment reports ever recorded. Recognizing this, there are two important investment observations:
1. The Benefits of Buying in Weakness
It takes courage to buy stocks in the midst of negative headlines, but doing so is typically the best time to capture long-term profits. Remember the adage of buy low, sell high.
2. The Dangers of Waiting for a Recovery
We understand that some investors want to see green shoots in the economy before committing new money to stocks. While this approach might make you feel more confident in your decision to buy stocks, you also need to recognize that a large part of a stock recovery might already be underway.
When we dig in deeper as to why the market staged a strong rebound, government stimulus is a definitive factor. The US government has never offered so much financial and economic stimuli so quickly during any economic downturn. Government support won’t save every business or every investment. However, it is providing an important crutch in an unprecedented time, helping millions with unemployment benefits, paid sick leave, paid family leave, stimulus checks, mortgage relief, student loan relief, business loans (many of which will be forgiven), and industry bailouts such as for the airlines, etc. Government stimulus won’t erase the impacts of COVID-19, but it’s certainly providing crucial support that gives the economy a stronger prospect for recovery.
This Will Be Temporary
While no one knows when COVID-19 will become a memory versus a reality, we do know that we will eventually move past this, just as we did with World War II, September 11th and the Great Recession. And, just like we recovered from each of these events, we will rebound from COVID-19 as well.
Businesses Are Opening
Areas of the country and the world are beginning to reopen for business. For many, it’s a different type of ‘business as normal’ with social distancing, masks, customer limits, and more. However, it’s a sign of economic life, while admittedly on a to-be-determined track, as businesses and officials monitor health impacts, new cases, etc.
We recognize that there is plenty of debate about the timeframe of available vaccines and efforts to accelerate trials. Yet we are confident in stating that we are making medical progress faster than ever before. Medical breakthroughs are the linchpins of a stock and economic recovery during COVID-19. Every day we are seeing advancements in discovering drugs that reduce the impact of the virus and in expanding progress toward one or more ultimate vaccines. We’re also seeing massive initiatives to prepare for the production of the billions of vaccines the world will need, including coalition efforts among pharmaceutical companies, support from the Bill and Melinda Gates Foundation, and more. No day is soon enough for a vaccine, but one will eventually arrive, and it could be within the fastest timeframe in history.
Some Stocks Are Surging – A Tale of Different Worlds
While most people typically look at the returns posted by the Dow Jones Industrial Average (Dow) or the S&P 500 index, few people delve deeper to the underlying performance of the 30 individual companies that comprise the Dow or the 500 companies that comprise the S&P 500. Furthermore, they also seldom look at how mid- and small-size companies, or international companies, are doing. This is a time when the variances are WIDE and DISTINCT. Companies like Amazon and Clorox are soaring due to demand, while many travel and energy stocks have been cut in half (or more). This is a time when large cap stocks (in aggregate) are up because of the cluster of technology companies that are faring relatively well, while many mid- and small-size companies are feeling more than double the downside market pain. Divergences throughout the market are extreme. Company products are either flying off the shelf (i.e., disinfectant wipes and at home delivery) or they are virtually non-existent (i.e., travel, car purchases, gasoline, etc.). Hence, when you look at the performance of the Dow or S&P 500, keep in mind that performance among the underlying stocks that comprise the index is rather varied.
How To Position Investments During Uncertain Times
As at any point in the markets, we never advocate market timing. Adopting a long-term investment approach based upon your current finances, income needs and your long-term goals is a winning strategy. With this, primary considerations include:
1. Job and Income Security
If you’re currently working, this is an important time to evaluate your job and income security. If you’re not sure about your employer’s ability to retain you, or at what pay rate, then it’s time to carefully evaluate your emergency reserves and if you might need to access some of your investments. Securing adequate resources in cash and high-quality bonds might be more paramount than trying to buy stocks on dips.
2. Adequate Cash and Bond Allocations
If you’re reliant upon your savings and investments to support your income needs, we strongly recommend holding at least five years of anticipated expenditures in pure cash, CDs or high-quality bonds. While not every recovery occurs within five years, we’re certainly hopeful that the virus will end before then.
3. Risk Appetite
Finally, investors should always carefully evaluate their risk appetite (your ability to own investments during market decline). Most investors need investment growth to achieve their retirement objectives. If this is true for you, then you ideally should develop the fortitude to maintain a level of stock exposure through market ups and market downs. However, if your propensity might be to sell if the markets decline again, then this is an important time to evaluate your investment holdings while the markets are higher, as well as your willingness to alter long-term life and financial objectives as a result of potentially lower long-term returns.
As always, no one has a crystal ball to say when the virus will be over, when the markets will recover, or when millions of people will be back to work. Perhaps we’re on a continued path toward a stronger stock market recovery, but every investor should be aware that further declines could happen. This is particularly possible if infection cases increase, or if companies don’t experience ramped up demand as the economy reopens. As such, every investor should be prepared for positive and negative outcomes, particularly in the short-term, while we watch health impacts and the potential return of consumer spending, which are essential to the markets and the economy alike. SageVest Wealth Management works carefully with each client to ensure that we’re posturing your investments to support your income needs as well as your long-term financial objectives. We always welcome you to contact us to discuss your investments and finances in greater detail.