Q2 2020 PastCast: Eye of the Storm

Here’s all you need to know. (If you’re in a rush.)

  • The markets are rebounding at a record pace – Following a broad market crash of about 30% in just 31 days to end Q1, US stocks have nearly regained all of those losses since the lows on March 23rd. In fact, April ended as the best April for stocks in 32 years.
  • Re-open for business – As COVID-19 hospitalizations and the rate of new positive cases began to decline in many of the hardest hit US cities, states and municipalities implemented their own localized reopening plans, leading to new optimism in the stock market. But the latest data suggests that this optimism could be short-lived as new shutdowns may soon be necessary in some areas of the country.
  • Recession confirmed – To no one’s surprise, economists confirmed that the US did in fact enter into a recession in February. Unemployment claims continued to rise, though the pace has begun to slow significantly.
  • Further relief in limbo – The Federal Reserve continued to provide monetary stimulus to stock and bond markets, instilling greater confidence for investors. But Congress is still fighting over further fiscal relief for workers, the unemployed, and businesses.
  • Here we go again? While optimism from new COVID-19 treatments and reopening of businesses across the country fueled markets for much of the quarter, June began to show a resurgence of COVID-19 across the country.
  • Staying the course paid off…yet again – There may be no better case study in history when it comes to our message to our clients to fight the urge to make big adjustments in times of panic, than what just happened in Q2 of 2020. Intrigued? Keep reading. 

 

And now for the long(er) version… 

Hurricane season is officially upon us. According to the world of meteorology, the season of the hurricane for North America begins June 1st every year, and lasts through the month of November. In the world of investing, the 2020 hurricane season got off to a very early start, with an economic storm unlike any other. 

If the first quarter of 2020 was defined by the catastrophic storm-of-the-century that missed all forecasts, the relative calm of the market in the second quarter could easily be seen as the eye of the storm for the investing world. As businesses began to reopen, widespread optimism grew, and a stock market recovery unlike anything we’ve ever seen began rather quickly and unexpectedly.

From March 23rd through the month of May, US stocks staged their single most impressive rebound in history, rallying nearly 40% in just 50 trading days. This included the best April for stocks since 1987! 

And yet, anyone paying attention to both economic and public health indicators across the country (and much of the world) would likely say this rebound makes no sense whatsoever. In many ways, we would tend to agree, given just how uncertain things remain right now when it comes to this Pandemic. But let’s see if we can answer a few key questions many of you are probably asking right now…

 

How can the stock market and the actual economy be so disconnected?

As we stated in our last PastCast, during times of economic crisis, the stock market often recovers well ahead of the actual economy. And often in a robust fashion that is entirely unpredictable. But that statement was never intended to be a prediction of what was to come in the very next quarter. We have no crystal ball. And we certainly didn’t expect the stock market to be where it is today.

In the midst of an economic crisis that’s been compared to the Great Depression by many measures, we are surprisingly now looking at major market indexes that are essentially flat or have actually managed to move higher on the year so far – to new all-time highs (as of 6/23) in the case of the Nasdaq

The overall economy, and the data we rely on to assess its state at any given moment, is mainly backward-looking. Recessions have even been officially identified by economic data months after they may have already ended. Measures like inflation and employment numbers are based on things that have already occurred and may not necessarily represent conditions today or going forward. 

On the other hand, the stock market is a forward-looking mechanism that is always looking toward the future. Investors evaluate a stock’s value primarily based on the company’s potential to grow future earnings and/or revenue (among other measures). And since the market is made up of individual stocks, stock market performance should be seen as a predictor of what investors are expecting of the business and economic environment in the future.

While current events certainly move the stock market up or down every single day, it isn’t the events themselves that cause investors to panic necessarily. It is the sudden uncertainty caused by many of those events that causes a moment of panic. That sudden panic often lasts as long as it takes for investors to take in new information and gain a clearer picture of what lies ahead, even if the time frame remains uncertain.

The COVID-19 outbreak in the US was the greatest of all catalysts for a market crash. Our country was not prepared, on many fronts, for what was to come. And that lack of preparedness, along with the threat of a brand new virus that we are still learning more about every day, created the perfect recipe for what was to follow – complete global panic.

There is not one single explanation for the rebound we’ve seen in stock prices after they crashed nearly 40% from all-time highs in February.  There are many reasons to consider. Too many to cover here. But regardless of the many possible contributing factors, optimism was on the rise throughout the second quarter and the rebound happened so quickly that many investors didn’t even have time to react until the rebound was well underway. We think that was a great thing for the majority of retirement investors. And especially for blooom clients.

 

What has blooom’s overall strategy been for clients during this crisis?

Anyone that’s been with blooom for some time now should have a pretty good understanding that we do not let short-term unpredictable market movements, media frenzies, or general panic get in the way of what’s truly the best advice for our clients – staying focused on the long-term and keeping emotions out of the equation.

By far, the most common question we receive from our clients during any market crash is some form of the following:

“With the stock market not looking so great at the moment, shouldn’t I be moving my money out of stocks and into something safer, at least until things start to calm down?”

Our answer (in short):
Don’t let your emotions get in the way of your long-term strategy. Moments like this are not the times to be making investment decisions that can drastically alter your ability to reach your goals later on. Stay the course, as painful as it may be right now, as disciplined investors with a strategy in place have historically been rewarded for patience in times of panic. Hindsight is the only way to truly see peaks and troughs in the market. History has shown us that time IN the market is far more important than timING the market perfectly. Market timing simply is not a winning strategy for long-term investors. Patience and discipline are. 

Please reach out to us before making a change to your investments on your own. This is why we’re here.”

Our advice, and our answer to this question, can be extremely frustrating for some to hear in the moment. We understand that. Especially in the midst of what we are currently going through as a country. But what we hope many of you have learned in your experience with blooom so far, is that our job is not to answer your questions with what you necessarily WANT to hear or what you expect to hear. Our job as your advisor, and a fiduciary, is to give you the answers you NEED to hear, when you need to hear them the most. 

We are very proud of the fact that in the month of March, as the sky was falling in the stock market, our own data indicated that less than 3% of blooom clients actually made an adjustment to make their blooom investment strategy more conservative. While we understand the desire to do so and our system allows clients to make these changes as they wish, doing so in the midst of an historic market crash is something we generally want people to avoid, if possible.

But we also know that there were others who made adjustments to their accounts on their own, without having a chance to talk through their concerns with us. Some ended up selling their stock investments completely to bonds or cash to avoid further pain after the market had already declined over 30%, effectively locking in those losses and making them permanent at the worst possible time – just before the market began to rebound days later.

If you happen to be someone that did just that, know that we don’t say this to shame you or anyone else. There are very few investors, or even advisors or asset managers with decades of experience, that can honestly say they haven’t made this exact same mistake on their own a handful of times. We simply hope to make it more clear to our clients that they hired blooom for a reason. And in order to do what we do best, we want you to remember we’re here to talk through these things with you in times when you’re doubting your strategy or you’re just feeling uneasy about the market. Know that we always have your back and online access to an advisor is part of your blooom membership. 

 

The eye of the storm?

What we’ve gone through so far this year, along with what recent public health and economic data indicates may lie ahead in the coming months, certainly feels a lot like a category 5 hurricane. In fact, it actually makes a lot of sense to think of this moment we’re in this summer, as the eye of the storm – a somewhat deceptive sense of calm.

But what we know about both weather and the stock market forecasts, is that neither is as reliable as we’d hope, when we need or want them to be. The virus seems to be making a comeback and a highly contentious presidential election is just months away.

What’s important as an investor in this particular moment is not your ability to know for certain what lies ahead (not possible), but instead to digest what this market has experienced in recent months and how you either did or didn’t react to it. Take advantage of this relative calm to remind yourself of the “Why?” behind the strategy you have in place and the reason you signed up for a service like blooom. And if you don’t know the answer or you happen to question if it’s the right approach for you, reach out to us for a conversation. 

Even the greatest of storms cannot last forever. And there are some things you can only learn in a storm.

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.

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