2020 Finishline: In Sight but Conditions are Foggy
Hello Everyone,
There's been a lot of ups and downs with the stock market this year with the anticipation of more uncertainty ahead as we enter the last quarter of 2020. I want to get to some of the specifics later, but I first want you to be sure to read a letter from Ron Copley in the link below. It's an intriguing story that in large part is why I am connecting with you today. It is a great example of how we as a country can continue to thrive despite the challenges we face.
Staying On Course By Focusing On What We Can Control
To summarize, it's great to keep up and have an understanding of what's going on, but very rarely wise to act on any current event as it relates to our long term financial plans. There are many reasons for this with the first being that the stock market looks ahead and moves up and down each day based mainly on future expectations of thousands of investors all with varying time horizons. This makes it extremely difficult, and nearly impossible, to successfully and consistently predict when to get in and out of the stock market. The good news is that we don't have to predict or make timing decisions to be successful. Our capitalistic system rewards investors in the stock market over time for taking risk to the tune of 10% average annualized returns and I have full confidence this long term trend can continue. Our focus just needs to stay on what we can control. Here's an example. I was recently faced with a question from a neighbor in his mid-30's that had a significant retirement plan balance given his age and income. He found himself in a position where he recently switched jobs and the rolled over funds were transferred over into cash. "Should I wait until after the election to reinvest and should I consider individual stocks?"
I asked more about his specific situation and uncovered that he was maxing out his annual 401k contributions ($19,500 per year), his family was living well below their means, and given his long time horizon before needing income from his investments, there was no reason to be burdened with making a timing decision or attempting to beat the market picking individual stocks. All he needed to do was reinvest his rolled over funds into a diversified portfolio of stocks and he would accumulate more than enough to withdraw 4% per year in retirement to cover his expenses with the help of compounding interest. He had already won the game! Putting himself in a position to make a bunch of timing decisions would add risk and additional stress to his plan that he didn't need.
Unless you're nearing retirement and know that you're going to need cash in the next 1 to 2 years, no one should subject themselves to market timing by cashing out and hoping for another market correction. I can promise you'll never reinvest it all at the bottom anyway so save yourself the regret and stay the course!
Snap Shot of Stocks in 2020
As I write, the S&P 500 index (Large U.S. Stocks) is set to have it's first down month since March but still holding on to a gain of over 3% for 2020. The Nasdaq Index (Large U.S. Tech Stocks) is currently up close to 24% year-to-date. These numbers do not paint the entire picture as we've seen extreme volatility to the upside and downside this year due to COVID-19.
The table above shows the year-to-date returns as of March 23rd (the bottom) and September 2 (the top). These numbers, and the resulting fluctuations of our investment portfolios, can be nerve wracking.
Looking ahead, we should go ahead and mentally prepare ourselves for more volatility surrounding the following events:
Potential COVID-19 Vaccine/Outbreak
Another possible round of Government Stimulus
Third Quarter Earnings (begin mid-October)
November 3rd Election and possibly delayed results
If you're the type to get worried, it's important to tune it out keep a long term perspective in order to put ourselves in the best position to succeed.
Elections and The Market
The upcoming election is causing some people concern about its potential effect on the market. The following chart shows that markets have trended higher regardless of which party wins so I hope this will give you the confidence you need to stay the course.
The big concern this year in particular is that we get a delayed result from having to count more mail in ballots. We only have one other example where this occurred which was the 2000 election between Bush and Gore. The election was held November 7th and the Supreme Court gave their final ruling on December 12th. During that time, the S&P 500 was down -4.24%. The chart below shows this period circled in red which is unrecognizable as the market was already trending lower following the ".com" boom which peaked in March of that year.
Anything can happen this year but it will be wise to once again tune out the noise, stay invested, and look to add to our accounts if possible regardless of the outcome.
FUNFACT: The Stock Market has correctly predicted the result in 20 out of the past 23 Presidential Elections going back to 1936. This winning indicator is whether the S&P 500 index was positive or negative 3 months leading up to the election. If positive, the incumbent party typically won, and if negative, the other party won. This year's date to start watching was August 3rd when the S&P was at 3,294.
Low Interest Rates Impact On Stocks
The Federal Reserve has made its policy clear that they intend to keep interest rates low for the foreseeable future. Their committee has 17 members and all 17 are against raising rates this year and next year. 16 are against raising rates in 2022, and 13 of the 17 are against raising rates in 2023.
They do this by purchasing U.S. Treasury bonds which has caused the 10 year U.S. Treasury Bond yield to fall to 0.65%. This rate indirectly impacts the rates you see on loans as well your bank savings and money market accounts and bonds issued by corporations. If inflation (the rate at which prices are increasing on goods and services) is 2%, you actually lose money on a 10 year treasury bond yielding 0.65%.
What does this mean for stocks? It nudges more investors into buying stocks because it makes future corporate earnings and dividends more valuable. This is an over simplification, but low interest rates favor a growing economy led by the housing market and rising stock prices and higher than average valuations going forward.
My wife, Mehegan, and I recently celebrated our daughter Virginia Parks' 1st Birthday. To add some excitement to the fun, we served cake with pink icing inside to reveal we're having another girl in April!
Girl Dad out! Please don't hesitate to contact me if you have any questions. Your confidence in me and your referrals to other potential clients that I could help mean the world to me so thank you!
Justin Burges
Investment Advisor Representative
Text or Call: 910-612-4060
jburgess@copleyinvestmentmanagement.com
CIM's goal is to provide quality financial advice at an economical cost. Whether investing for retirement or the next generation, you can rest assured that we are paying attention. Our professional credentials, independence, experience, integrity, and transparent business model qualify us to accomplish this goal.
