Mid-Year Update

As we turn the page to the second half of 2021, my first observation is that this year seems to be going much faster than 2020 did.  With the proliferation of effective vaccines against COVID-19 and the retreat of the pandemic, the economy and regular life is opening back up and making life much more enjoyable. 

Over the past year, we have seen a historic series of fiscal stimulus packages in response to the pandemic and our shutdown of some parts of the economy.  In addition, we’ve also seen the Federal Reserve take unprecedented action to increase the supply of money in our economy. 

The employment market has shifted its power towards workers. There are now more job openings than people looking for work even as unemployed people have not returned to pre-pandemic levels.  Many American workers are using this pro-employee market to look for new jobs that better fit their skills and priorities.

The broad US stock market as measured by the S&P 500 ended the first half of the year at 4,297, up 15.3% including dividends.  If the market ended the year at the same place, that would be an above-average year. Companies are making nice profits and the expectations for the second half of the year and beyond are that they will make even more profits.

Consumers are doing quite well in terms of cash on hand and loan balances compared to asset values.  Armed with cash, they are doing their job of helping the demand side of the economy.  The supply side is not quite ready to meet the demand for goods and services with labor shortages and imbalances in the global supply chain.  The debate among economists is when these supply-side shortages will be worked out.  For long-term investors like us, it is less important to figure when these blockages will clear than our belief that they will be worked out over time.

The historic stimulus and money printing by our Federal government have created an experiment that is impossible to predict.  The question of the day is how much inflation will come from the possible overstimulating of the economy.  Federal Reserve Chairman Jerome Powell has addressed this possibility and stands ready to take action, although the timing of that action may be up for debate.

All of this begs the question, “what do we do now?”  First, let’s acknowledge that it’s OK to be scared by the unknowns in front of us.  We are human, after all.  If we didn’t experience any emotions, good or bad, this life would lose its meaning.  Our fears are more than just numbers on a monthly statement or flashing on a computer screen.  Our investment portfolio represents trips we didn’t take and clothes we didn’t buy so that we would be better prepared for the future.  When we talk about markets, we’re really talking about our greatest hopes, goals, fears, and dreams, like sending our kids to college or not running out of money in retirement.

If we can press the rewind button in our minds, let’s revisit the reasons why we started investing in the first place.  Good investing is always goal-focused and planning driven, so ideally, we started with certain goals.  A common one is retiring at a certain age and with a certain income.  The goals have probably evolved over time and may include multiple generations, but they are still goals to invest for.

The design of your investment portfolio is based on taking the least amount of risk to achieve the stated goals.  Our portfolios are designed with the weighty evidence of history to give us a sense of how markets behave over time.  That history includes economic recoveries like this one with high asset values and rising costs.

If our goals haven’t changed and the investment process is solid and based on the long-term history of the markets, then our best course of action is to stay the course.  That may sound like a cliché at a time when you want something more complicated, but that doesn’t mean that something else will work better.

Most of our goals are not in the next 12 months.  If they are, we shouldn’t be taking risks with those funds.  Most of our goals are multi-decade and even multigenerational.  As of June 30^th, the interest rate on the 10-year US Treasury bond was 1.5%, while inflation over the previous year was 5.4%.  Fleeing to bonds may feel like the only solution to market turmoil, but it is no way to meet our goals.

Having advised clients through multiple market cycles, I have found that predicting market tops is impossible.  In the past, when the market reaches a high, it is more likely to reach another new high than to suffer a correction or bear market.  Simply being at a high isn’t reason enough for a decline.  Now is the time to trust the plan and have faith in the future.