Let’s start with a very short recap –
The high of the US stock markets occurred in February, but by the end of the 1st quarter the S&P 500 Index was down -19.6% and the Dow was down -23% - pretty much a “worst quarter” since the financial crisis and the 1987 crash respectively.
To make sense of any situation we usually look back to similar events, time periods, or crises to see a similar pattern or trend onto which we can impose an idea of where we are and what comes next.
Unfortunately (or fortunately), Pandemic is not an experience we have seen in this modern and certainly digital world. So, can we use past experience as a guide? I believe we can, but we must humbly admit that the virus will dictate the timing of the outcome.
What are the “Knowns?” Well, we know that stock markets are leading indicators of the economy. That means the market will move either up or down in advance of the economic reality arriving on the ground, so to speak. Just before and as this Pandemic induced closure of much of our economy unfolded, we saw a startling and rapid reversal of stock market valuations as news regarding COVID-19 broke into the economic data on which those valuations are based.
With over 17 million people now unemployed, the next “Known” is that we are in a recession even if it is not yet declared. Many economists expect the second quarter will be the low point in the economy. If containment measures have worked and society as a whole feels comfortable going back to work in the workplace, going back to prior habits of eating out and social gathering, we may see an economic recovery in the second half of the year. Of course, the virus is in charge here.
Remembering that stock markets are leading indicators, and if we anticipate correctly that the second half of the year will begin to show positive GDP growth, then (logically) we should see a “market up” trend by the beginning of the third quarter.
Forecasting is tricky at best, and in this environment of many “Unknowns,” I hesitate to offer this as anything other than an idea of what should follow based on past experience. That past experience tells us that in an environment of extremely low interest rates, fiscal and monetary stimulus both here in the US and worldwide, we should see sustained positive stock market movement into recovery before the end of the year. Again, we are entirely captive to the spread or containment of the virus, and the recommendations of true experts regarding the advisability of returning to some semblance of normal social behavior.
Regarding portfolio performance, we see that “old school” diversification works: the inclusion of bonds and cash (low to no risk assets) in portfolios not only reduced volatility it gave those portfolios a bit of cushion in the first quarter crash. We also believe that re-balancing portfolios regularly will work for you, and adding in or adding to some scary asset classes like International Equity or High Yield Corporate Bonds will be appropriate for some investors as we move through historic lows in most risk assets.
In a world that seems to make no sense, please keep in mind that ‘This too shall pass;” we just can’t assure you when.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
No investment strategy can ensure a profit or protect against loss in a declining market