The first six months of 2020 saw the advent of the worst global public health crisis in a century - since the 1918 influenza pandemic. In response, the world locked down, putting its economy into a kind of medically induced coma. In this country, the immediate effects were (1) a savage and nearly instantaneous economic recession, accompanied by record unemployment, and (2) the fastest, deepest collapse in stock prices in living memory, if not ever.
Though we usually cover the economic and market environment with you individually as part of our regular review process - and will again - the stark drama of the last half year has been such that I wanted also to report to you now. This letter is divided into two parts, the first a statement of general principles, especially those most relevant in the current crisis, with a restatement of how I practice my stewardship of your invested wealth. The second is a review of what little can be known at this point, and of how I propose we continue to deal with the pervasive uncertainties of the moment.
I believe that all lastingly successful investing is essentially goal-focused and planning-driven. All failed investing is market-focused and event-driven. Stated in another way: every truly successful investor I’ve ever known was acting continuously on a long-term plan. Every failed investor I’ve known continually reacted to sudden and terrifying market shocks.
Thus, I’ve found that long-term investing success is only incidentally a function of the economy and the markets. It is a direct function of how the investor reacts - or, more properly, how he / she refuses to react. You and I are long-term, goal -focused equity investors, acting on our plan with patience and discipline. The smaller part of what I do for clients is the crafting of that plan. The much larger part is helping you not to react in stressful times like this.
I continue to believe that the equity market can’t be consistently forecast, much less timed, and that the only certain way of capturing equities’ superior long-term returns is to sit through their occasionally steep but historically temporary declines.
Review and Outlook
At midyear, the best that’s to be said is that the first great wave of the pandemic appears to be abating, and the economy is slowly reopening. As it continues to reopen, there will inevitably be some flare up in new infections. The interaction between the pandemic and the economy in the short to intermediate term is therefore perfectly impossible to forecast, as is the timing of the development of a vaccine.
The equity market crashed from a new all-time high on February 19 to a bear market low (so far) on March 23, down 34% in 33 days. There is no historical precedent for this steep a decline in so little time. Confoundingly, it then posted its best 50 days in history. It is not possible to forecast the near-term course of corporate earnings or dividends, as they - like the economy they reflect - are still largely hostage to the pandemic. That said, I invite your attention to the fact that on June 30 the yield on the 10-year US Treasury note was about 7 tenths of one percent. I infer from the current state of interest rates that though it is impossible to forecast equity earnings, dividends and prices, it can be stated as fact that few of my clients can continue to advance toward the achievement of their long-term financial goals in bonds, at anything close to today’s yields. This is just another reason why I’ve advised you to stay the course in equities.
It should also be noted that even if the pandemic continues to subside and the economy to recover, investors will still have to deal with what maybe the most widespread civil unrest in our country in decades, and what promises to be a bitterly partisan presidential election cycle. Emotions will continue to run high, with unpredictable short-term market consequences.
I’ve very deliberately labored in this summary to convince you of the sheer unknowability of the short to intermediate term economic and market outlook. In the next breath, I remind you that not one of you is investing for the next one to four calendar quarters. I say again: you and I are long-term, goal-focused, planning-driven, patient, disciplined investors. Our focus in on history rather than headlines, and our mantra is from Churchill: “The farther back you can look, the farther forward you are likely to see.”
Finally, I urge you to think back to January 1st of this year. Have your most cherished lifetime financial goals changed since then? If not, I see no compelling reason to change your plan - and no reason at all to change your portfolio. Be of good cheer. This too shall pass. Optimism remains, to me, the only long-term realism.
By all means, please keep in touch with us with any questions or concerns. In the meantime, thank you - as always- for being our clients. It is a privilege to serve you.
Any opinions are those of author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.