The Current Reality and How to Deal with It

Blog post #439

The US and International stock markets have rallied strongly over the past few weeks, since the low around March 23rd.

We are facing one of the greatest challenges of our lifetimes, in both medical and economic terms. And while the growth rate of Covid-19 spread is clearly dropping due to physical distancing, we don’t think that the medical issues are anywhere near being resolved enough to enable the economy to fully recover anytime soon.

From the 2020 high, the S&P 500 (an index of 500 US-based large companies) dropped 35% to its low point around March 23. A major decline like that is logical, given the almost total economic shutdown in the US and in many other parts around the world. Indices of other stock market asset classes have declined as well, some by much more, both domestically and Internationally.

It does make sense that other sectors have gotten crushed even more than the overall 35% decline, such as airlines, hotels, retail and energy sectors.

But since March 23, the S&P 500 and other asset classes have recovered sharply. As I write this mid-day on Thursday April 9th, the S&P 500 has gained 28% from its bottom and is now a 20% move back to its earlier 2020 all-time high point.

The current reality is that the stock market, as it always does, is quickly reacting to news and future expectations. The stock market reacts quickly and unexpectedly, but not always logically. 

The above sketch by Carl Richards makes so much sense and is very logical. We are in the midst of a current reality that is unknown and unpredictable (the future is always unpredictable, but even more so now).

Stock markets are responding up and down, sometime widely, based on medical news, forecasts, predictions and hopes for an economic resumption. They are also responding to major Federal Reserve actions and other recovery program announcements and legislation.

So how do we manage your accounts, to help you reach your short and long-term goals, given this volatility and all the unknowns? We stick to the long-term plans that we have developed for you. We follow our long-term philosophy and discipline that we know has worked well for many years. It is really the only rational approach.

We certainly do not follow the chart below. We do the exact opposite.

When things were really scary and the market was declining in early to mid-March, we were tax loss selling. That means we were not getting you out of the market, but we sold investments to recognize taxable losses and replaced them at the same time with similar, but different investments.

In the past few weeks, we have gradually been re-balancing accounts, which is what the above sketch DOES NOT describe. We were buying low, not selling. When others were scared and selling, we were taking a very long-term view and have been buying more stocks. In late 2019 or early 2020, when others thought things were safe (and buying), we were gradually selling some stocks, if your portfolio allocation to stocks was too high, in excess of your personal investment plan stock target.

This logical and disciplined approach is really the only way to successfully navigate the stock market over the long term, in a calm and reasonable manner. We may not time the bottom, but we are not trying to.

We don’t know if there will be another bottom….weeks or months from now, if the medical news changes or an economic recovery takes longer than many other investors appear to be anticipating. This is why we are buying, but gradually.

For most of our clients, we are comfortable with a gradual re-balancing approach right now. For our younger clients who have a very long-term time frame, we are re-balancing more aggressively. We are handling your accounts on a very individual basis, as you each have different time perspectives, circumstances and goals.

We hope our investment approach and disciplined philosophy makes sense to you, and provides you with a form of comfort, during this time of great uncertainty.

We hope you and your families are healthy and safe, and can connect virtually or by phone, during this holiday weekend.

 

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