Second Quarter Market Review
John Fischer, CFA®, CFP® | Chief Investment Officer
July 15, 2020
The first half of 2020 can be described with a single word: unprecedented. Never before in our history have we witnessed a self-induced shutdown of the U.S. economy.
But as the novel coronavirus that causes COVID-19 spread across the globe and the World Health Organization declared an official pandemic, we watched the quickest bear market drop on record followed by the worst economic downturn in the U.S. since the Great Depression.
At this point, who doesn’t yearn for the old market headlines about trade wars and tariffs with China, the newest Brexit developments, and ongoing geopolitical concerns with Iran and North Korea?
And yet despite the considerable human and economic devastation that occurred in the first half of the year, the market has shown extreme resiliency. After the market bottomed on March 23rd, down more than 30% from its February highs, the S&P 500 experienced its best quarter since 1998. Remarkably, that second-quarter rally helped the market to finish the first half of the year down by only 4%.1
Continuing to Deal with Ongoing Uncertainty
The market’s swift rebound caught many investors by surprise due to the severity of the economic downturn and uncertainty that remains surrounding the virus, a vaccine, and viable plans (or a lack thereof) for re-opening the economy.
As we look towards the second half of the year, there is still much we don’t and can’t know regarding the pandemic that will shape the balance of 2020.
How severe will the recent spike in cases be and how will it impact the re-opening of economies across the country? When will a vaccine be discovered, and then be available for broad dissemination? What additional fiscal and monetary stimulus will the federal government and the Fed provide to support the economy?
Building a Roadmap for the Second Half of 2020
The lack of ability to know the answers to these questions in advance means any predictions are merely guesswork, where we’re no more likely to guess the outcome as we would be to guess the result of a random coin toss.
Given that, what should investors who want to better understand how to deal with these unanswerable questions do? One idea might be to approach the uncertainty with the same tactics we employ every day we drive a car:
- Adjust your mirrors – The mirrors in our car help us spot potential risks behind us that we might not otherwise see. Looking back at the past quarter, we’ve witnessed a robust market rally despite record-setting unemployment that remains above its Great Recession-era peak. While a recovery in stocks preceding a recovery in the economy is not unusual, considerable uncertainty remains as the economy re-opens and waits for a vaccine. The risk of failing to reopen safely or a prolonged period of time until a vaccine is developed could cause episodic setbacks for stocks in the second half.
- Make sure you’re in the right lane – Just like you should drive in the far-right lane if you’d like to travel at a slower speed on the highway but use the left lane to pass, you should be using the appropriate “lanes” in your portfolio that align with your comfort with risk, your time horizon, and your financial goals. Now might be a good time to rebalance back to your targeted asset allocation, and before you dismiss this idea – remember that swift market declines can alter our perceptions of our comfort with risk.
- Put your phone down – We all know that looking at our phone while driving is dangerous to ourselves and those around us. Keep in mind that watching screens (be they smartphones or TVs) and consuming sensationalized content can be just as dangerous to your investment portfolio. Be mindful of what and how much you watch and avoid making emotion-driven, short-term decisions with long-term assets. Creating a financial plan and having the conviction to stick to it even in difficult times can help sustain a long-term approach.
- Keep your eyes on the road – As drivers, potential distractions abound. The better we focus on our lane and our ultimate destination, the more likely we are to get there. The same holds true for investors, and we need to keep this in mind as one big distraction looms at the end of the year: the U.S. presidential election. Historically, elections have proven to create short-term volatility in the market but are not long-term drivers of stock market performance. Before we let the elections take our eyes off our financial path, let’s heed the lessons of the last presidential election: the markets expected Hillary Clinton to become president and assumed the market would sell-off if the less-predictable Donald Trump indeed won. Neither the election result nor the ultimate market outcome were correct. Let it serve as a reminder of the perils of taking our eyes off our investment road.
- Make sure you’ve got good brakes – One of the best ways to avoid a bad car accident is to stop or slow your car to avoid a collision. You can do something similar with your investments by owning high-quality bonds as part of a diversified portfolio. These can provide the “brakes” needed to reduce the amount of pain you might experience if and when stocks decline like they did in February and March. The S&P 500 fell by a nauseating 33% but during the same timeframe, the Barclays Aggregate Bond Index lost just 1%. It’s another reminder that despite lower interest rates, investors would be well-served to continue to own bonds as part of a diversified portfolio.
- Buckle your seat belt – At the end of the day, we can take all of the proper precautions when driving and still be exposed to the risk of a car accident. It’s why all drivers should wear seatbelts; they make us safer from all risks, including the ones we don’t see coming. As investors, buckling your seat belt means making sure your portfolio is well-diversified by owning different types of stocks and bonds, so that they don’t all move in the same direction at the same time. By doing this, our portfolios are better prepared to weather the risks that we know of (like ongoing trade wars) and those that we can’t see coming (like the coronavirus pandemic).
The Road Forward
Each time we get into the driver’s seat, we accept a certain amount of risk that we may have an accident. We take this risk because we believe the benefit of such mobility is a worthwhile reward. But we know that doesn’t change the fact that risk remains and we must take precautions to reasonably minimize it.
When it comes to investing, we also accept a certain amount of risk due to the uncertainty and volatility of markets that can cause our portfolios to decline in value. We accept this risk because of the opportunities that investing can afford us in offering returns that are far superior to cash in the long run.
While we continue to navigate a pandemic without a vaccine and with unclear plans for a complete re-opening of the economy, no one can be certain of what the second half of the year holds for investors.
But by taking a page from our driving habits in focusing on what we can control and mitigating the risks within our purview, investors can give themselves the best chance of avoiding accidents and getting where they want to go: to their financial goals.
Source: 1 Morningstar
Important Disclosures: Visionary Wealth Advisors (“VWA” or the “Firm”) is an SEC registered investment adviser. For information about VWA’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent version is available on the SEC’s IAPD website at www.adviserinfo.sec.gov.
This Market Review (“Review”) is provided for informational purposes only. The Review should not be construed as personalized investment, tax or legal advice, including the recommendation to engage in a particular investment strategy. This Review, by itself, does not contain enough information to support an investment decision. All information in this Review is considered accurate at the time of production, but no warranty of accuracy is given.
Furthermore, investors should not assume that future performance of any specific index, security, investment product or strategy referenced in the Review, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). Past performances referenced in the Review may not be indicative of future results and may have been impacted by events and economic conditions that will not occur or prevail in the future. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices referenced in the Review are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products. Investing involves the risk of loss and investors should be prepared to bear potential losses, including the full amount invested.