Broker Check

This is not a Mid-Year Outlook

| July 15, 2020

“History is philosophy teaching by examples “ – Thucydides 

At the start of every year, financial institutions and asset managers prepare yearly outlooks to predict what will happen in the investment markets and economies in the coming year. Despite being researched and prepared by some of brightest, most intelligent and well educated people in the world, more often than not those investment outlooks miss the mark dramatically. That doesn’t stop me from reading through a dozen or so each January; several are still saved on my laptop desktop. I’ll reread some in December just for laughs.

I could spend a couple paragraphs rehashing the 2020 predictions but none of it would be useful. We all know that the global covid pandemic was a complete shock that no one predicted and has changed our world in ways we could not and did not anticipate. As Mark Twain said “It’s tough to make predictions, especially about the future.” 

So this is not a Mid Year Outlook. I wish I could know what the rest of 2020 holds so I could help you and your family plan to get through it safely, both in health and wealth. But I know what I don’t know. More than ever I have a strong sense of respect for how tenuous our expectations of a “normal” future are. 

Since this isn’t an outlook, a review of what the first half of the year threw at us may be useful. The catch phrase in the financial planning industry is “past performance is not an indicator of future results.” We can’t simply extrapolate the future from the past. But we can learn from history and use those lessons to guide our decisions moving forward. 

Here’s a few lessons that I’ve relearned (or had strongly reinforced) in 2020:

1. Asset allocation and rebalancing works. How you have money invested in different asset classes (stocks, bonds, cash) and rebalancing those asset classes before major market moves is critical. A balanced portfolio of stocks and bonds (60% stocks/40% bonds) did not drop nearly as much (-20.2% for balanced vs. -32% for all stocks) at the lows this March and recovered more quickly than an all stock (+3.6% vs. -0.3% as of today) portfolio.

2. Sticking with your investment plan works. The S&P 500 index was down 37% for the year at its low point in March. As of today, the S&P 500 is down less than 1% for the year. Trying to time the markets this year has been excruciatingly difficult. Selling at the lows could’ve cost more than 1/3 of your stock holdings compared to doing nothing and being down the equivalent of one day in the market.

3. The Federal Reserve Bank has a huge impact on markets. The Fed’s zero interest rate policy, bond buying programs and lending programs have put a floor under the markets. The Fed moves this year in response to the virus shutdowns have not only stabilized markets but likely pushed up prices, especially in growth stocks. When interest rates are so low (0.6% on the 10 year US treasury bond), stocks look much more attractive.

4. Economic reporting and data are behind the curve in a pandemic. The unemployment reports, GDP reports, jobless claim reports and monthly purchasing managers index reports don’t tell the whole story in real time. The economic contraction from the shutdown was so sharp and quick it’s hard to fathom. The snapback has also been sharp and quick. Will it last and what is the shape of the recovery? Only time will tell.

5. Commodity prices are insanely volatile. Oil went from $61 per barrel on Dec. 31, 2019 to -$37.63 per barrel on April 20 and back to $40 per barrel today. It’s still hard for me to understand how oil was worth less than $0 on April 20th, but it’s a lesson that commodities are massively unpredictable, especially in the short term when demand for a commodity evaporates. Copper prices, often a leading indicator of economic activity, have increased 35% from March and are now positive for the year. Definitely a better sign than what oil prices were signaling in April.

6. Patience as an investor is critical. The only prediction I’m willing to make for the rest of 2020 is that patience will be critical. With an uncertain return to school, questionable resumption of pro and college sports and a presidential election this fall our resolve will continue to be tested. There will be news items that shake our confidence in the markets and economy. Distance from family and friends doesn’t makethis any easier. Having the patience to stay with an investment plan in tough times is a skill investors need, especially this year.

Wishing you and your family an enjoyable rest of the summer and hoping you stay healthy and stay positive as we move into the second half of the year.