Tag Archives: investing

2020 Stock Market: How is this possible?

“None of this makes sense” – Everyone, circa 2020

On the morning of July 30, 2020, the Commerce Department announced that US economic growth declined by 33%, on an annualized basis. That’s a number that far exceeds anything we have ever seen in this country. In other words, April through June of 2020 was the worst quarter for economic growth in US history. It’s worth also noting that unemployment jumped from historic lows of around 3.5% in Q1, to nearly 15% in Q3. Another all-time record. And not the good kind.

So how is it that on that very same morning, the S&P 500 opened just 4% below it’s all-time high, after rallying nearly 50% in only 4 months, including the best 50-day period for US stocks EVER?!

Good question. Let’s talk about a couple of ways something that seems to make no sense at all right now on the surface, could actually make all the sense in the world.

 

The stock market is not the economy

You may have heard this phrase recently. Maybe even from us. Whether it’s the media or our favorite or most loathed politician, we’re made to believe that the performance of the stock market is an appropriate measure for the health of our economy at any given moment. In reality, it’s just not that simple. 

The stock market is a forecasting mechanism. It is always forward-looking. The reality is that the day-to-day movements of the stock market are based mainly on how investors believe recent news will ultimately impact future earnings of publicly-traded companies. On the other hand, all economic data that is released to the public is based on what has already happened, not what lies ahead.

Since this particular economic crisis is somewhat self-imposed and there is broad consensus that an inevitable vaccine will eventually lead us out of it, investors seem to be looking past the initial uncertainty which caused the crash in stock prices we experienced in March. Although the actual economy is in terrible shape at the moment, investors generally aren’t putting their money to work for an immediate return. True investing is a long-term journey. Many long-term investors have likely seized on the opportunity to put more of their money to work in the market at (somewhat short-lived) lower valuations – generally a pretty good move from our perspective.

 

“The market” might not be what you think it is

Stating that the S&P 500 is within 4% of its all-time highs can be a bit misleading. What many people don’t realize is that the S&P 500, while widely used as THE benchmark for US Large Cap stocks, is not exactly representative of the whole US stock market. 

To no one’s surprise, there are 500 companies represented by the S&P 500 index. Yet, because it is a market cap weighted index, the 5 largest companies make up more than 20% of the index. In other words, the performance of FaceBook, Amazon, Apple, Microsoft, and Google, account for 20% of the performance of the index as a whole. So while those 5 companies are up over 35% on the year so far, the other 80% of companies represented by the S&P 500 are still negative on the year. 

Not to be a downer, but the investor outlook isn’t as rosey right now for the vast majority of US businesses as this most popular market benchmark might indicate.

 

What does all of this really mean for long-term investors?

Diversification matters. It’s very easy to fall into the performance-chasing trap of finding a single investment or asset class that has performed well recently relative to your portfolio and shift everything into it. 

Recency bias is the tendency for investors to assume that recent performance will translate into future performance. Unfortunately, succumbing to this bias is one of the most detrimental mistakes long-term investors can make. 

2020 will no doubt be a year that ends up providing numerous examples that reinforce the importance of having a long-term strategy and sticking to that strategy, rather than letting emotions take the wheel. 

At blooom, we believe an appropriate long-term strategy involves broad, global diversification. In the entire history of the stock market, it has never made much sense or been predictable in the short-term. Investors have been searching for a crystal ball, unsuccessfully, since the beginning of time. Even considering the perpetual uncertainty of the stock market, we can’t think of a single year that has ever highlighted the importance of having a personalized investment strategy, more than 2020. 

Here’s to a better second half!

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Investors should consider their ability to continue investing through periods of fluctuating market conditions.

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Election 2020: Don’t Mix Politics & Investing

Election years can be extremely nerve-wracking, to say the least. Add to that a heavily politicized health and economic crisis and the fact that most Americans are still adjusting to an entirely new way of life for the foreseeable future, and you have a pretty decent recipe for some unprecedented stress and anxiety. 

But when it comes to investing for a long-term goal like retirement, your personal political views can be a dangerous ingredient to mix into your strategy. History shows us that making decisions to alter your investment strategy based on anticipated election outcomes and/or personal political biases, is just not a good idea, no matter what “side of the aisle” you find yourself on. 

 

“The Market” doesn’t have a political party

Investors tend to give far too much credit AND blame to elected officials for stock market performance. This is especially true of Presidents. Much of this has to do with investors always searching for something simple to cling to that confirms their own biases, which then may help justify investment decisions. 

No matter which side you’re on, you probably feel strongly that the person or party you vote for will have a positive impact on the country, the economy, the stock market, your personal finances, etc. You also probably feel strongly that if their opponent wins, the opposite will occur. But a simple look at history shows that the market simply does not care which political party is in power. 


Source: Capital Group

This chart shows us that the long-term trend has been up, regardless of political partisanship. And neither party is clearly better or worse for stocks. If only it were that simple. What the chart ignores is all of the other factors that contribute to market performance and have nothing to do with who the President happens to be at the time. Wars, scandals, global crises, economic shocks, you name it. All are unpredictable and happened to every President on this chart. And yet, with exactly seven Republicans and seven Democrats included, we have yet to see a single event in our history that has broken the long-term uptrend of our stock market and economy.

 

Remember when…

You may remember that prior to President Trump being elected, the stock market (and much of the world for that matter) had seemingly priced-in and fully expected a Hillary Clinton Presidency. The night of the election in 2016, as the results began to indicate a Trump victory instead, stock market futures began to tank as many had predicted a Trump victory would be terrible news for the stock market. And yet, once the market had time to take in the results, we saw stocks rally significantly immediately after the election and in President Trump’s first and third years in office. And more importantly, the economy continued its historic decade-long expansion, until this year’s COVID-19 pandemic. It was the sudden shock of an unanticipated result and the newfound uncertainty of what that result meant, that ultimately spooked the market for that short time in 2016. It was not the political result itself that the market ultimately cared about, as it had been doing relatively well on year at that point, while expecting the opposite result just prior to election night.

You may also remember that prior to President Obama’s election in 2008, and reelection in 2012, his opponents argued strongly that his policies would destroy capitalism and the American economy, and lead to further declines in the stock market. Yet, President Obama ended up presiding over the longest period of economic expansion in US history, alongside the longest period of uninterrupted gains (longest bull market) for major US stock indexes like the Dow, S&P 500, and Nasdaq, in US history.

We can go on and on with these false narratives that didn’t play out as predicted, following nearly every election, but the fact of the matter is that Presidents (and their political party) generally do not deserve anywhere near the amount of credit OR blame they receive when it comes to stock market returns. Investing is unfortunately just not that simple.

 

The next election is always around the corner

When the dust settles and the campaign rhetoric ends, whether we have a new President or not, we will move on and the narrative will then shift to real policy, actual geopolitical events, and ultimately, the next election. This cycle never ends in a Democracy. So why should your investment strategy change due to what you think may happen as the result of any single election? 

Fear is a powerful weapon that skilled politicians know how to use very well. Uncertainty is the ammo most harmful to the stock market in any short-term period. And nearly every Presidential election cycle generally involves a series of warnings from all candidates that if their opponent should somehow win, the country will ultimately lose.

We’re all made to feel that every election is the most important in our lifetime largely because of this fear of the unknown and the perpetual “what if?”. Yet, the fact remains that these politically polarizing narratives have not played out well following any election in quite some time, if ever. And there simply is no real long-term correlation between the political party in office and economic growth or stock market performance, despite what political pundits and politicians themselves will probably continue to claim from now until eternity.

Despite all of this, we know that many have, and will continue to try, to jump in and out of the market based on their political ideology and election results that may either confirm or conflict with those beliefs. But we often reiterate with our clients during times like these that time IN the market is far more important than timING the market. Don’t believe us? Just take a look at how harmful a politically motivated investment strategy (on either side) would have been for long-term investors, dating all the way back to 1896…

This election is important, as all elections are. Voting is a right none of us should take for granted and we all know that elections do have consequences, whether you like the results personally or not. But as you enter the ballot box this November (or mail in your ballot from a safe, socially distant location), our hope is that the Dow, S&P 500, and the entirely unpredictable future returns of your retirement accounts are the farthest things from your mind.

Still feeling uneasy or need a better understanding of your own investment strategy? Reach out to a blooom advisor. We’re here to help!

The 2020 Voter Registration deadlines for many states are coming up.
Go to
www.vote.gov
to register to vote or check your current registration.

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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