A historic pandemic precipitated historic economic implications both in the U.S. and around the world. It is safe to say 2020 has been one for the record books, and it is only half over!

Uncertain times like the environment we currently face breed stock market volatility, and so it is no surprise that we have seen some of the wildest swings in stock prices this year. In fact, several days this year have resulted in a few of the worst performance days in the history of the stock market.1 But what may be less known is that we have also seen some of the best performance days in the history of the stock market during 20202:

Largest Daily Percentage Gains

Largest Daily Percentage Losses

The Risk of Trying to Time the Market

No one likes to lose money, and so a natural instinct when markets fall fast is to sell and seek safety. The problem with trying to time the market, however, is that it is not only hard to decide when to sell, but perhaps even more emotionally difficult is to determine when to buy. This is especially difficult if you have already missed out on the strongest days of the rebound. Trying to time the market is by definition risky.

History says that the best strategy has been to stay invested and ride out short-term volatility:

Hypothetical Growth of $1,000 Invested in US Stocks in 19703

Note: Based on the total return of the S&P 500 from Jan. 1, 1970, to Aug. 31, 2019

Too Much Too Soon?

Despite the aggressive fiscal and monetary stimulus, the fundamental realty is still quite sobering.  Although some economic trends are improving, we are still facing an economy where small business owners are struggling, and reopening efforts are stalling and even reversing in some parts of the country. It is likely we will continue to face double-digit unemployment and negative gross domestic product well into the second half of 2020. We still do not have an effective, safe, or widely available vaccine for COVID-19. Without a vaccine it will be hard for the economy to function at full capacity and for things to return to normal.

We know that stock prices are generally a leading economic indicator. In the past, stocks have often anticipated changes in the economy, in both directions. So, it’s not a huge surprise that stocks have risen on simply “less negative” news, especially following such an historically rapid fall during the first quarter.

But the big questions du jour are these: Is this rebound too good to be true? Have financial markets run too hard too fast? Have stock prices become disconnected from economic reality, teeing us up for a rude awakening in the form of another market rout in the not-to-distant future?

Maybe…but not necessarily. The truth is, no one knows, and you should ignore anyone who claims to have the answer. For the sake of your peace of mind, consider turning off the television and the Twitter feed. If the last six months have demonstrated anything, they’ve demonstrated that anything can happen. I can’t think of a single economist or prognosticator who predicted the way events unfolded or the market response to those events during the last 6 months. Let’s all stop paying attention to short-term forecasts!

But here’s one thing you can hang your hat on: the management teams of the several thousand companies that make up the U.S. and global stock markets go to work every day with the goal of figuring out how to be more profitable and make more money for their shareholders. Betting against human ingenuity and adaptability has historically been a losing bet. Many businesses, including Modera, have been able to utilize technology to continue our work and stay connected with one another and our clients. In fact, technology enablement is a big part of the economic story. Many parts of the global economy could not have functioned at all if COVID-19 had hit 15 years ago, when remote team collaboration and mobile communications technology were mostly unavailable.

I can tell you also that I remember hearing similar concerns about “too much, too soon” during prior recessionary periods when stocks rallied in advance of the economic cycle bottoming. This was especially true during the summer of 2009 and 2010. Anyone who based their investment decisions on negative predictions and downbeat news stories through those years suffered serious long-term financial damage, missing a significant, permanent market advance. It is normal for the stock market to turn upward while the economic data is still terrible, and people are feeling discouraged.  I expect this time will be no different.

Looking Ahead

The year 2020 cannot end soon enough for a lot of people, myself included!  The wild swings in financial markets to-date have our heads spinning (even those of professionals, who invest money every day for a living).  It will take years for us to fully measure the human cost of the pandemic, in terms of lost lives, mental health, and standards of living. If the pandemic isn’t bad enough, we are experiencing civil unrest rivaling that of the 1960’s and a political environment that is more divisive than I can remember in my lifetime.

The Federal Reserve and Congress have poured a historic amount of debt-driven stimulus into the economy during 2020 to keep people and businesses afloat. This was necessary to stem the bleeding and provide a bridge across rough economic waters. But this kind of stimulus does not come without its own potential longer-term financial and economic risks. There will be a lot of ink expended over the coming years, by myself and others, analyzing the long-run implications of tripling our deficit to mitigate the economic downturn. The consequences are far from clear and I look forward to exploring that in the future.

The stunning rebound we have seen in financial markets during the second quarter does not guarantee that we are out of the woods and back to normal. There could easily be more volatility ahead in the second half of 2020 as we try to wade through more uncertainties and economic bad news.  However, I believe this economic recovery will be like many others before it, in that the markets will turn decisively upward before we all start to feel better about things.

Our job at Modera Wealth Management LLC is to work with you to establish a financial plan and help you manage your wealth to that plan, regardless of the ups and downs of the market.  Some years our job is harder than others.  I have great optimism that as humans, with our endless capacity to innovate and collaborate, we will rise to the challenges before us, conquering the pandemic and mending the divisions in our society. The Modera team looks forward to talking with you about your plans and investment strategy through this difficult year and beyond. Stay healthy and safe!

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