“If timing the market is such a great strategy, why haven't we seen the names of any market timers at the top of the Forbes list of richest Americans?”
~ Peter Lynch”
The most common question that we get these days is some variation of “the markets have gone up so far already – shouldn’t we take some money off the table? ” Apart from the discipline of rebalancing, when market moves push asset allocations away from their target levels, we generally advise against market timing.
It is enticing to, in anticipation of a potential market decline, to de-risk a portfolio and then buy back in at lower prices. It sounds reasonable because we all know that there will always eventually be another drop in the market. This approach is rarely a profitable strategy because the market has typically recovered by more than it’s come down.
The strategy feels even more appealing when, like today, the market is expensive and there are so many worries on the horizon. Who knows, there may be worse things out there that we haven’t considered yet.
Imagine going back 5 years, to the end of 2016 in a time machine and warning investors that the next 5 years would include the COVID-19 pandemic, Global trade wars, Brexit and an Inflation spike.
Would investors have been correct to expect serious declines in the market?
- The S&P 500 dropped almost 20% in late 2018 and 34% in early 2020 Would investors have been right to wait for these big dips to buy into the market?
- The S&P 500 never dropped below its 2016 level (see chart of the month below)
The cynic in me points out that this is true only because the market has gotten more expensive since 2016, and future returns will likely be lower. The key point is – adding risk on market dips can boost returns, but decreasing your risk in anticipation of a dip (a.k.a. market timing) is unlikely to work in your favor. Of course, this means that your portfolio will take a hit when a dip does eventually happen.
The best approach to tackling this issue is to have an investment strategy that you understand and can stick with, while maintaining enough liquidity set aside to see you through the down period. In other words, a robust financial plan.
Wishing you and your family all the very best this Festive Season!
Call me with questions.
Will the pandemic threaten the future of big cities?
Investment insights from Capital Group
You might think where you buy your coffee in the morning doesn’t amount to a hill of beans when it comes to the health of the
U.S. economy. But, in fact, it could mean a great deal in the years ahead.
“Working remotely for the past year and a half, I’ve been buying coffee closer to home instead of my usual downtown coffee shop,” says Capital Group economist Jared Franz. “In my case, it doesn’t mean much, but if a quarter of the U.S. labor force does it one or two days a week, it has significant implications for the economy, financial markets and the future of large cities.”
While the data is short term and the jury is still out, there are early signs of a powerful deurbanization trend in the United States and other major developed economies. Since the start of the COVID-19 pandemic, migration from some big cities has accelerated while suburban home prices have soared. Moreover, national labor force surveys indicate an overwhelming majority of employees who have been working from home want to continue doing so one or more days per week.
By 2022, Franz estimates, roughly 25% of U.S. employees could be working remotely — up from just 5% prior to the pandemic — and many of them will choose to live in less expensive, less crowded areas. Assuming this shift persists, it would be the biggest change in labor force patterns since World War II.
“From an investment perspective, we need to determine how durable these changes are, how they could affect consumer spending patterns and how companies may respond,” Franz explains. “For instance, what happens to that downtown coffee shop? Or the restaurants that serve the same area? Or the office space that is no longer needed?”
“I don’t think we are talking about the death of big cities, by any means,” Franz stresses. “But I do think we may have reached peak density for urban centers such as Chicago, Los Angeles, New York and San Francisco. They will have to adapt to a world where much of the labor force is no longer coming into an office every day. Twenty-five percent may not sound like much, but it’s a huge change from 5%.”
Many important questions remain unanswered: Will people flock back to big cities after the pandemic is over? Will they prefer life in the suburbs and other outlying areas? Or will both happen at the same time — perhaps with younger employees preferring to live in vibrant, dynamic cities and older workers continuing to fuel the growth of the suburbs and exurbs?
One crucial question appears to be resolved: People like working from home.
Surveys by the National Bureau of Economic Research show that employees who are able to work from home definitely want to continue doing so. More than 77% said they would like to work remotely at least one day per week and 31% said they would prefer all five days. Not every job can be done remotely, of course, but 64% of respondents said their jobs are conducive to working from home at least part of the time.
It’s important to note that not everyone is on board with the work-from-home phenomenon. There has been a quiet backlash in recent months from certain companies pushing for more traditional work schedules, as well as the possibility of lowering the pay of employees who move from high-cost cities to lower cost areas. Companies don’t appear to be gaining much traction on those issues at the moment.
One large investment bank recently posed the question of whether we have reached the end of the honeymoon phase of remote work, citing concerns about employees’ isolation and mental health, the loss of company culture, the fate of downtown businesses and the growing threat of cyber attacks.
Sectors that benefit from deurbanization
Many sectors stand to benefit if the deurbanization trend endures, including personal travel and leisure, technology and communications, cloud computing, and the home improvement industry and residential real estate — particularly in the suburbs and other outlying areas.
Changes in consumer behavior mean these trends could be durable even as we head back to the office several days a week. For example, stores such as Home Depot and Lowe’s have clearly benefited from more people buying new and existing homes in the suburbs while the shift toward home fitness has boosted companies such as Peloton and Nike.
Exercise and outdoor activities are a potential bright spot, says Capital Group portfolio manager Lisa Thompson. “As an investment theme, I think it’s almost metaphoric. People are spending more time in nature, hiking or riding bikes, and they are realizing it’s actually very nice to be outdoors, to spend more time with family, to visit the national parks. I have friends who go camping now I never imagined would go camping.”
Sectors that suffer from deurbanization
On the flip side, commercial real estate stands out as one of the hardest hit sectors, and the outlook remains challenging to say the least. Office vacancy rates nationally rose above 17% in the second quarter of 2021, up from roughly 13% in the first quarter of 2020 before government-imposed lockdowns brought the economy to a virtual standstill.
Commercial real estate loans, meanwhile, have not experienced the type of distress or outright defaults that investors might expect, largely due to government stimulus programs that helped small and mid-size companies meet their lease and payroll obligations. “We’re in a holding pattern right now because government support has been so strong,” Franz notes, “but as we move into 2022, I think that could change materially for the worse.”
Within the wider real estate industry there has been a large disparity between subsectors that have been hammered — office, retail and hotel, for instance — and others that have rallied as the economy and stock markets recovered from the downturn. Those include storage, industrial and residential categories.
In states with large urban centers, state and local government finances could also be impacted, Thompson adds.
“Deurbanization puts a lot of pressure on states like New York and California that have relied on a very high tax base of wealthy people in Manhattan, Los Angeles and San Francisco,” Thompson notes. “It could wind up being a big challenge for states that
have benefited enormously from the mega-city concept.”
Echoing Franz’s sentiment, however, Thompson says she expects large urban centers to adapt and eventually thrive in a post- COVID environment. Big cities are resilient, she says, and they have a long history of recovering from difficult times.
“I can remember when big cities were not places that people wanted to go in the 1970s and 1980s,” Thompson recalls. “Today, older people may say, ‘I don’t need to be in the city anymore,’ but I think younger people will still want to be at the center of civic life and entertainment. Cities will just reinvent themselves again.”
Here is a link to the full article: Will the pandemic threaten the future of big cities?
Sources: ally.com; sofi.com; motleyfool.com; nerdwallet.com; investopedia.com; moneyharmony.com; empower.me; kiplinger.com; Raymond James research; University of Minnesota
All investments are subject to risk, including loss.
*Views expressed are the current opinion of the author, but not necessarily those of Raymond James. The author’s opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.
*There is no assurance any investment strategy will be successful. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance may not be indicative of future results. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small- and mid-cap securities generally involve greater risks and are not suitable for all investors. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Individual investor’s results will vary.
*Gross Domestic Product (GDP) is the annual market value of all goods and services produced domestically by the U.S. Past performances are not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.
*This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.
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*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.