Why This May Not be the End of the World
Updated: 17 hours ago
The events of this year have been like none other. I have run out of adjectives to describe the year we’ve had so far. The stock market went along with the madness in the first half of the year ending the longest bull market on record with the fastest bear market on record. In just 33 days, the S&P 500 lost 34% of its value. It reflected the shrinking economy, which was heading into a recession. What happened next shocked everyone. Starting on March 24th, the market began the greatest 50-day rally in its history. By August 18th, the US stock market recovered everything it had lost and set a new all-time high.
Even as the stock market recovered, the situation in the real world looked ever more chaotic. Every day, the news reports tell us that the world is falling apart. This has led many investors to wonder if this market rally will stick around or fade away. Although predicting the stock market in the short run is impossible, I’d like to offer reasons why equities may be appropriately valued to give an alternative perspective that is not seen on the nightly news.
First, let’s take a look at the Covid-19 virus data. Although confirmed cases have remained high, even doubling the first wave peak of 30,000 cases per day with over 60,000 cases per day in early July, the daily death rate has been more than cut in half from the March and April highs. There are numerous theories about why this has happened, from the virus mutating to a less severe form, better treatment options, and better protection of our most vulnerable citizens. In any case, this is good news and has helped the economy reopen to some extent.
On the research front, the entire global medical research community has shifted its efforts to this new virus. Whether the research is for treatments or a vaccine, this effort has become the 21st-century version of the Manhattan Project. 11 vaccines have progressed to phase 3 trials, which involve thousands of volunteers in each study. There are even more in the earlier stages of testing. The market is always looking to the future, and the odds look reasonably good that at least one of these will prove to be both safe and effective.
Fiscally, the US and other governments have opened the coffers to pump the economy with cash. The response has been enormous, from stimulus checks and higher unemployment benefits to small business loans and bailouts for the airline industry. A new stimulus package is on the table, and some form of it is likely to be passed later this year or early 2021.
The Federal Reserve has done its part to pitch in during the crisis. On March 23rd of this year, the Fed announced that they would use the tools at their disposal to make sure that the credit markets wouldn’t freeze up. This announcement occurred on the day that would become the bottom of the stock market free fall. They decreased their interest rate to zero and have made their intentions clear on keeping it there into the foreseeable future. These moves have paved the way for businesses to access cheap capital to fund their operations and for homeowners to refinance their mortgages to free up cash or cash flow.
Most importantly, businesses have found ways to adapt. They have improved their online offerings in some cases. In others, they have created protocols to follow to keep their customers and employees safe. While some industries like travel and entertainment are in a difficult spot, other industries like home improvement and RVs are having their best years on record.
This market bear market, although different in length, has reinforced the lessons of prior bear markets.
1. The market cannot be timed consistently.
2. Market declines of this size (but not speed) are relatively common.
3. The market decline hits bottom long before we can see the path to recovery.
4. Stocks recover before the economy, as a whole, recovers.
5. Equities are the only way most of us will achieve our long-term goals.
6. Optimism is the only long-term view that aligns with history
If there were ever a year to admit that we don’t know what’s coming next, this would be it. However, long-term, goal-focused investors should be thrilled to see so much uncertainty because those are the moments when they are rewarded by sticking to their plan.
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