by Jordan Hucht, CFP®, ChFC®, AIF®
It may be hard to believe, but 2020 is nearing an end. It’s been an historic year in countless ways, and in fitting fashion, the year will end with what’s surely to be a drama-filled election.
As we brace for the final chapter of 2020, likely to be filled with covid spikes and political theatrics, let’s pause and consider where we are, what’s likely to come, and what to do.
First, let’s address the top question on many clients’ minds: “How can the market be so high when
things are so bad?”
Though this is a complex question, there are several, relatively simple contributing factors:
- Markets are forward looking. It’s not lost that 2020 will be a dismal year for many companies, but at this point, investors are more focused on earnings expectations for 2021 and beyond.
- Trillions of dollars of stimulus. Remember, that’s trillions with a “T,” a tremendous amount of money flowing into the economy, including into financial assets. Though Washington is currently stalled on the next round, it’s widely expected that more stimulus is coming by year’s end.
- Low interest rates. The Fed slashed rates in the spring and has forecasted low rates for several years. Among other things, low rates mean that companies can borrow money cheaply and investors favor riskier assets (stocks) over low-yielding, more stable assets (bonds).
- Makeup of “the market.” When people think of “the market,” generally they only consider the most prominent stock index, the S&P 500, which is an index of 500 large, public companies in the US. It’s important to understand that the S&P 500 is not a representation of small, local business, and it’s an index that is heavily weighted toward technology. Very large technology companies have fared well in this year’s adaptation to pandemic lifestyle, and their relative outperformance skews the overall index because they account for an enormous part of the index. Other segments have fared far worse, but they’re much smaller components of the market.
- Optimism for widespread delivery of a vaccine in early 2021. Through public-private collaboration to develop a vaccine at a pace never before seen, several vaccine candidates are currently in late-stage clinical trials. There’s a tone of optimism in the market that we will have an approved vaccine in the coming months and widespread delivery in the first
half of 2021.
Among these factors, there’s a critical point to understand with regard to the short-term behavior
of financial markets:
The presumption of vaccine success suggests a fragility to the markets that could come to bear should the optimism wane in the face of unexpected setbacks. That’s a very real possibility.
What about the economy? The short answer here is that the economy is improving, but has a long way to go to reach pre-pandemic levels. For insight, let’s look to the labor market. The unemployment rate jumped from 3.5% in February to nearly 15% by April, as more than 20 million jobs were lost at a staggering rate. Since then, the economy has regained about half of the jobs lost, and the unemployment rate currently sits just under 8%. There’s no doubt that’s good progress, but the analogy I use here is that of losing weight:
If you’ve ever tried to lose weight, you know that the first pounds come off the easiest, but it gets harder and harder as you get closer to your target weight. That may not be a perfect corollary, but I think the point resonates. There’s hard work ahead, and the rate of progress is likely to slow. Surely, there’s far to more consider with regard to the economy, but I think the labor market serves as the best measuring stick to gauge the current recovery.
So, we’ve got a market near all-time highs, heavily fueled by stimulus, cheap money, and optimism, coupled with an economy in the midst of recovery from shutdown-induced recession, and now we’re going to throw in what’s likely to be one of the most contentious elections in recent memory. What does that mean for markets, your portfolio, and your financial plan?
First, remain calm in the face of volatility, which could certainly spike as we near the election and in the months that follow. Think back to basics and recall that stocks are at times volatile and oftentimes unpredictable in the short term. Long-term outcomes are far more important than short-term fluctuation in value, so discipline wins over emotion.
Second, if you’re in the withdrawal phase of your portfolio, understand where withdrawals are coming from. In most portfolios, we’ve built internal reserves of stable assets that provide a multi-year withdrawal runway. We never want to sell depressed assets for the purpose of taking a planned withdrawal.
Third, consider whether anything in your life has changed that would warrant a change to your financial plan and investment strategy. Your financial plan and portfolio are designed to meet your goals within the constraints of your comfort level for risk. If either have changed, both should be revisited.
As we head into the final months of a year unlike any other, everyone will be closely watching what unfolds as we near November 3, and quite possibly in the weeks that follow. But as we watch what transpires in the near term, let’s not lose focus of the long term.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.