Skip to main content

Sound Advice: September 16, 2020

 Beware the Witching Season

The months of September and October have historically been among the most difficult of times for the stock market.  On average, September has been the weakest of the year.  October has been Ground Zero for the biggest market drops of the last 100 years. Yet despite the fact that has been a period of increased volatility, it has often been a time when weakness has been followed by a significant rebound.  Even so, let's not jump the gun.

There may be no weakness and there may be no rebound.  For the first seven weeks of this year, stocks were on a tear.  Then came the pandemic, which led to a national lockdown and devastation among the nation's businesses.

While prices were climbing, so were valuations, almost to a point of excess. Then a new era of volatility showed up, with daily changes in the leading averages often running into triple digits.  In the wake of the plunge, market prices did a sharp about-face.  The rebound, however, was largely driven by a handful of tech stocks while the broad market lagged far behind.

That rebound continues, despite the likelihood that corporate earnings will be down by more than 25% this year and may not get back up to 2019 levels for two to three years.  So current valuations appear to be discounting far ahead.

One reason for high valuations is ultra-low interest rates and the Fed has made it quite clear that it will maintain interest rates at near-zero levels for several years to help the labor market.  With more than 10 million people still out of work, that will be a huge challenge.

Although the summer months have provided opportunities to be out and about, the upcoming fall and winter will bring another span of confinement. Let's hope that sometime next year the fruits of intensive medical research may allow us to return to something approaching normal living.  A number of vaccines are now in Phase III clinical trials, but there are hurdles to be crossed before we can sound an all-clear.

One hurdle is the combination of efficacy and safety.  The next hurdle is production and distribution.  To be sure, there are other questions:  How long will immunity last?  Will booster(s) be needed?  Which vaccine is the most effective?  And so on.

There is no magic bullet and daily life will not get back to where we were overnight.  While waiting, we are all best advised to take the necessary precautions to stay safe and healthy. 

Ignoring best practices, gathering in large groups, and making as if the situation has changed is indeed a recipe for disaster.

There is no vaccine for stupidity.

N. Russell Wayne, CFP®

Comments

Popular posts from this blog

Sound Advice: May 13, 2020

Reality Check

On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history.  Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better.  They are not.
For one thing, we are now in the midst of earnings reason, when companies report their quarterly results.  Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement.  Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison.
With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news.  Who knows how many of these folks will go…

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections
Through the spring months, most of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent.
We are now in a recession.  
The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimony before Congress, Fed Chie…

Sound Advice: July 22, 2020

Fixed Income: In a Fix
Typically, the construction of an investment portfolio has begun with an approximate balance of 60% in equities and 40% in fixed income instruments.Fixed income generally means bonds, but that includes bond funds and exchange-traded funds holding bonds.The equity portion is intended to be the driver of capital appreciation over extended periods of time and the fixed income portion is supposed to provide stable, albeit more moderate ongoing rates of return.
The theory behind this approach is that as the time periods measured have lengthened, the relative risk of holding equities has diminished while the returns they have generated have been higher than those of other asset classes.What equities do in the short term, even a year or two, is often anybody’s guess.
To the extent that fundamental analysis can help toward determining future equity values, investors need to look ahead three, four, five years or more before reasonably expecting that the odds will be on thei…