First and foremost, we hope that you and your family are well. Let’s take a few minutes to review what happened last week, what we think will happen this week and some advice for investors.
If you felt strong winds on Thursday afternoon, it was the collective exhale of investors after the Dow Jones surged 21.3% from Tuesday through Thursday. This represented the largest three-day gain since 1931. Even after a 4% decline on Friday, U.S. blue chip stocks ended with their best week since 1938, with a gain of 12.8%. To further summarize:
· Last week, the Dow Jones gained 12.8% and is now down 24.3% since January 1st
· The S&P 500 gained 10.6% on the week and is now down 21.3% since January 1st
· The Nasdaq gained 9.1% on the week and is now down 16.4% since January 1st
3.3 million Americans filed for unemployment - two times what analysts had expected. No doubt that many more Americans will file for unemployment in the coming weeks.
Why was last week so positive for stocks and bonds?
On Monday most stock indexes were down over 30% from just a month earlier and many investors felt the market was oversold. The expectation of a $2 trillion federal stimulus bill and additional liquidity provided by The Federal Reserve to the bond market encouraged investors to remain invested and increase their allocation to stocks and bonds. The aggregate bond market gained 3.3% for the week.
I understand Congress and the Fed have acted, but is there an analogy that can help me understand what it all means?
To best slow the spread of Covid-19 in the U.S. and support our existing healthcare system, Americans need to flatten the curve through social distancing. To comply with social distancing, businesses need to close and Americans must stay at home. This results in increased unemployment, a contracting global economy, and a possible recession.
Imagine our economy is suddenly a very sick patient. The $2 trillion Cares Act is a form of medicine for the patient, giving money to businesses and keeping people employed. The Federal Reserve lowered interest rates and provided liquidity to the bond markets through a bond-purchasing program. This is another form of medicine for the economy as it keeps borrowing costs low and will likely reduce unemployment. Publicly traded companies working together with the President to develop more Covid-19 testing and treatment options is yet another form of medicine for this very sick patient. None of these medicines work alone to make our economy immediately healthy, but all of these medicines will work together over time to ensure the patient will get better again.
Has the stock market hit the bottom, and is the worst behind us?
Investors never know if a market has bottomed until after it happens. The fiscal and monetary support our economy received over the last two weeks was welcomed news. This week investors will focus again on the data relative to new Covid-19 cases in the U.S. If the number of new cases exceeds expectations, then investors will anticipate a delay in economic recovery and stocks could certainly retest their lows. Bear markets (a 20% decline or more for stocks) always end in recession and there is no doubt our economy is shrinking. While markets could retest their lows again from last week, investors should begin to position their portfolios for the inevitable recovery.
Advice for Investors
With stock markets down approximately 20% for the year, and the bond market up only slightly since January 1, most portfolios have drifted from their original targets. For example, a portfolio that should be 60% stocks and 40% bonds may now be closer to 50% stocks and 50% bonds due to market movement. If the client’s long-term financial plan called for them to be 60/40, then adjustments need to be made.
A rebalance from 50/50 back to 60/40 for this hypothetical investor is likely the smart long-term move. To do so, they should sell a bit of the bonds that have appreciated and buy a bit of the stock investments that have declined. As a result, they will have repurchased stocks at a lower price than they were earlier in the year and bring themselves back to 60/40.
Timing a market and planning a rebalance can be a difficult endeavor. With the Fed and Congress acting, there is now support for our economy and businesses and we believe a rebalance now makes sense. The rebalance can be done in one large step or in several small ones. In either case, investors need to be thinking long-term, and a portfolio rebalance is a normal strategy for long-term investors.
As mentioned in previous emails, it is ok to feel scared or nervous when reading the unsettling headlines. However, it is not ok to panic in your portfolio and sell unnecessarily if you are a long-term investor. The best days in the market often happen when we least expect them. Tuesday’s 11.4% increase in the Dow Jones came just as many nervous investors may have already thrown in the towel.
Our thoughts continue to be with health care workers on the front lines taking care of our fellow Americans. Wishing you and yours a healthy week.
Matthew A. Somberg, AIF®
Accredited Investment Fiduciary®
Co- Founder and Principal