Recovery - Phase 1
In December of 1991, as the U.S economy was recovering from a relatively mild recession, the S&P 500 increased in value by 11%. That was the largest monthly return in the stock market over the past 30 years – until last month. The S&P 500 gained 13% in April, starting, but certainly not completing, the recovery of the stock market. This result leads to many reasonable questions and concerns, which we will address below.
A Recap of Savant’s Perspective
This is our sixth update since the coronavirus crisis began in the U.S. We’ve been consistent in both our short- and long-term view. Long-term we anticipate an eventual full recovery with an uncertain timeline – perhaps as long as 18-24 months, and perhaps shorter. While that might seem obvious now, in the middle of the panic in March, many investors and analysts clearly didn’t think so, or stock values wouldn’t have imploded as much as they did. Short-term we expected, and still anticipate, a lot of fluctuation in daily values. Of course, the degree of volatility is always relative. The S&P 500 fell by 1% yesterday – four months ago that would have been headline grabbing information, but today it’s … meh.
Why the April Rise?
There are two main reasons for the rapid increase in values during the month. The first is simply the reduction in anxiety from investors. The initial reaction to the crisis in March was a lot of panic, followed by panic about the panic. A client asked me this week if some of the recent optimism was purely psychological – the answer is yes, but it’s the corollary to the psychological pessimism gripping the market in March.
The second reason for the rise is, objectively, the situation is far less ominous now than it was a month ago. You can use your favorite analogy about the flattening of the curve, but clearly social distancing has reduced potential spread of the virus. That has wonderful implications for our nation’s health, which of course, is also good for the economy. Plus, particularly over the past couple of weeks, there’s more optimism about treatment protocols and the potential for a vaccine.
A valid question to consider is if the economy is nowhere near a recovery – indeed, the comeback is just starting, and starting very slowly – why has the recovery started in the stock market? Capital markets should be, and for the most part are, forward looking. What impacts market values isn’t what has happened, but what is likely to happen. Unfortunately, the financial press, particularly in times of crisis, continually ignores this. The lead financial story on Wednesday was the data indicating U.S. GDP fell by 4.8% in the first quarter, and then some journalists seemed perplexed that stocks rose by over 2% on that day. The reason there was no negative market reaction is because every analyst knew that GDP was going to fall – the magnitude was largely irrelevant. Making investing decisions based on GDP data would be like an operating room surgeon reacting to four-month-old vital signs. The real news on Wednesday was related to the success of virus treatment trials and new announcements of Fed policy.
The Road Forward
While the stock market comeback has started, it’s far from done. From its high on February 19 to its recent low on March 23, the S&P 500 fell by 34%. The rise in values in late March and April mean that it’s about 3/5 of the way back. There are two reasonable expectations to have. First, recognize that the remaining 2/5 of the comeback will not happen in May – it will be a longer recovery, and likely will not be complete until 2021 or later. Second, the road back will not only be long, but it will be bumpy. The specifics about what we don’t know about the medical aspects of the virus and the economic ramifications of the shutdown far outweigh what we know, and as society gains more information, financial markets will react. We will see 5% daily declines and 3% rises, and that volatility will persist throughout much of the year.
Your Investment Policy
There are three types of investor reactions over the past two months – investors who thought about the notion of selling, but, perhaps with the help of counsel, were never deeply concerned; investors who were deeply shaken, strongly considered selling everything, but in the end decided not to sell; and investors who panicked and sold all or most of their portfolio and went to cash. (Actually, there’s a fourth group – investors who, not even for a millisecond, had any sense of concern or panic, but those people were taking hallucinogens and won’t be reading this). What you do going forward depends on which of the three groups you’re in.
For the first group, you should congratulate yourself for riding out the crisis (as you did in 2008 and several other periods of volatility in the 2010s) and continue with your existing investment strategy.
For the second group, you should also feel good about your decisions. However, you might consider discussing your concerns with your advisor, and perhaps slowly adjust your strategy over the next year or two to a policy that is more consistent with your comfort level of risk. There is more art than science in assessing risk tolerance, and your comfort with your portfolio should be of paramount in importance.
For the final group, you should continue to “shelter in place.” If you jumped out of the stocks in the past couple of months, the time to get back in is not AFTER a 20% rise in values and more volatility on the horizon.
If do have any questions, as always, we’re here to answer them.