Clients are repeatedly asking: “How can the stock market be doing so well with all the tragedy and uncertainty surrounding the pandemic?” It’s a fair question that merits a straightforward, but also a more complex response.
The Fed has been our economic “hero”
While frontline health care workers are true heroes, the Fed’s monetary stimulus and support has not only stabilized markets but propelled them to new highs. In the quickest market cycle ever recorded, stocks went from all-time highs, plunged to bear market lows and catapulted right back to new highs. Had the Fed not stepped in to lower rates and largely eliminate risk, it’s reasonable to say markets would be trading at very different levels today.
Stocks have already performed remarkably well. With vaccine distribution accelerating and the anticipation of a fully open economy, the rally in equities is understandable and perhaps even justified. However, investors should note that while predicting a result involves one level of difficulty, forecasting the longer-term outcome from that result can be quite challenging.
How did I get the result right but the outcome wrong?
It’s an age-old dilemma and the past decade provides glaring examples of misfortune for investors who were able to correctly predict the result of an event… only to miss terribly in betting on the outcome.
Does a reopening economy mean stocks will shine?
Not withstanding the continued calamity of the pandemic, investors can find reasons for optimism. Many companies are reporting better than expected revenues and earnings, while households sit on large amounts of cash and pent-up demand. All the while the Fed promises to remain extremely accommodative.
On the other hand, stock valuations, as measured by earnings multiples, are at the highest end of historical ranges. And speculation abounds – note elevated levels of margin debt and recent activity in stocks like GameStop. Buy beyond stocks, it may be difficult to find an asset class described as undervalued.
Three recommendations for Investors
As shown, it is common for even shrewd investors to accurately predict the result of an event, but totally miss on the longer-term investment outcome. With this in mind, we offer the following prudent advice to investors:
1. Welcome the gains! The pandemic brought tremendous upheaval, yet nearly everyone’s portfolio performed better than expected. Welcome those profits.
2. Remain diligent in thoughtful portfolio diversification. With so much uncertainty on the public health and economic fronts, has there ever been a time when prudent diversification was more important?
3. Think long-term and “all-weather”. While any portfolio can face declines in a challenging market, it’s helpful to have a long-term time horizon and include asset classes with the potential for relative outperformance in a variety of settings.
Accurately predicting a result can be challenging. However, forecasting the longer-term outcome of that result can, at times, prove nearly impossible. We encourage investors to remain thoughtfully diversified.
At Trust Point, we are focused on creating diversified portfolios that achieve a client’s desired return on investment with the least possible risk. Our clear investment philosophy, combined with our proven principles, puts clients at ease and confident about their financial future. For any questions or to discuss your portfolio, please contact us at 608-470-7107 or email [email protected].