When we wrote our last commentary at the end of March, the markets had just completed an unprecedented 6-week decline. The market had priced in the worst-case scenarios and as we noted was starting to look ahead to what the next 3 to 6 months may bring.
Fast forward and the past three months have seen many encouraging developments for investors. Stock market indexes have increased substantially, and tangible positive events lead us to conclude that further gains are in store.
Compared to March, we have a much better understanding of COVID-19, how it spreads, and who is vulnerable. We know that Federal Reserve action and new government programs have greatly reduced the risk of widespread bankruptcies. We also have some idea of how the economy may recover. Based on an analysis from Goldman Sachs, they estimate that consumers will have more disposable income in 2020 than 2019 thanks to the CARES Act. Furthermore, according to credit card data from JP Morgan, consumer spending is currently only 5% below 2019 levels after being as much as 38% lower in March.
There are still important risks in the market, however, and not all areas of the market have recovered quickly. The S&P 500 is down 4.55% for the year through June 25th with the performance mostly from large cap growth-oriented companies. The value side of the market (financials, consumer staples, energy, etc.) is still down 16.84% as measured by the Russell 1000 Value Index. Most international markets are still down more than 10% as well.
We have reason to believe that the worst is behind us and the market can continue higher, albeit with more volatility. At its highs in early June, the market was pricing in a lot of optimism, minimizing near-term upside potential.
Recent news regarding increased case counts, uncertainty regarding the continued recovery, and election uncertainty will keep the market from going up in a straight line. However, there is strong evidence that the economy has bottomed with high-frequency economic data continuing to outperform analysts’ expectations. Furthermore, investors have a record amount of cash that is likely to be redeployed into stocks (rather than bonds at extremely low interest rates), and underlying supply/demand dynamics in the market are healthy.
The quick market drop, resulting recovery, and dispersion between the best and worst investments are great reminders of investing truths: stick to a long-term plan, and follow a disciplined process. We will continue to follow our process going forward.
We are always available to discuss the markets, your portfolio and review any financial plans.