On the first trading day of the month, June 1, 2020, American, European, and Asian stock indexes moved up, ostensibly on signs that global factory activity was recovering. U.S. indexes continued climbing June 2nd as traders seemed to discount violent protests across the country.
Where we go from here in the 3rd quarter of the year as July approaches, is, at best, the subject of well-informed ruminations. Look at the daily stock charts in The Wall Street Journal or other sources. They seem to paint an optimistic picture, betting on a relatively quick recovery from the Covid-19 lockdown. On June 2, the Nasdaq Composite Index closed at 9608.37, only 2.1% below its 2/19/20 all-time high of 9817.18. The Dow Jones Industrial Average closed at 25742.65, 12.9% below the all-time high of 29551.42 reached 2/12/20. The S&P 500 index closed at 3080.82, 9% shy of its 2/19/20 all-time high of 3386.15. In looking forward relative to the S&P 500, keep in mind the influence of “big tech” on that index.
The Big 5 tech behemoths, Amazon, Google, Apple, Microsoft, and Facebook, comprise 20% of the capitalization weighting of the S&P 500, which is why that index and the tech-heavy Nasdaq are closer to their record highs than the Dow. Since the Dow includes only 30 companies, and not exactly the largest U.S. firms by market capitalization, the S&P 500 index generally is considered to be more representative of the American stock market and our broader economy. The question is, will mega tech-related stocks continue to lead as the recovery rolls on?
The Congressional Budget Office (CBO) opines it could take up to ten years for the economy to recover from the pandemic and shutdowns. Skeptics might note that in a September 9, 2008, report the CBO projected real GDP growth would slow in 2008-2009, but remain positive with unemployment rising to plateau at just above 6%. One week later Lehman Brothers collapsed, leading to a major recession. The stock market tanked, unemployment soared. Your personal investment philosophy and risk-taking profile should not be driven by forecasts!
Much of what props up stock prices are forecasts of future earnings. Coming out of the shutdown, earnings forecasts are cloudy and likely to stay that way for awhile. Based on a collapse of earnings estimates, some analysts think the S&P 500 index is expensive. On 6/2/20 the WSJ reported that the index traded at a price/earnings (P/E) ratio of 21.6 times earnings, a level “last seen during the dot-com bubble” of the 1990s that ended with the early 2000 bust. By extension, ETFs (exchange traded funds) that mimic the S&P 500 can be viewed as relatively expensive.
Some investors and money managers who were over-weighted with trend following passive investments during the bull market, are shifting toward a higher proportion of active strategies in the search for bargains. Mid- to small-cap stocks, such as those reflected in the Russell 2000 stock index, thought to better represent what’s happening on Main Street USA, are getting increased attention. International stocks are being researched for relative bargains.
Regardless of the broad brush, the question is, “How much risk do you wish to take or need to take going forward?” Diversification became a yawn inducing subject during the long bull run led by large cap, tech-oriented behemoths. Going forward, how should your portfolio be allocated? Despite low yields on savings deposits and money market funds, should you beef up reserve funds, what we’ve for years called a Freedom Fund? We read of investors badly hurt going into the pandemic as they weren’t well padded from a cash and fixed income standpoint so as to preclude significant losses.
For investors ten years or less away from an assumed retirement date, or those now retired, the pandemic brought the realities of mortality into focus since deaths from Covid-19 were disproportionate among those age 65 plus and/or those with existing health challenges. Do you need to rethink living and testamentary estate planning? Should you get with your advisor to review wills, trusts, powers of attorney for assets and health care, advance directives? Have you reviewed life insurance policies to be sure they’re performing as originally projected? Black swan events impact economies and markets periodically, but personal “black swans” strike individuals and families every day given the vagaries of life. Business owner, is your succession plan, your business continuity plan, well structured, in place, and up-to-date?
As you come out of whatever you experienced during the pandemic’s interruption, forget about losses to life as it was. Focus on what will be. Seek new ideas, cultivate new energies, harness new resources, master new tools. Your Covid-19 reset is available now for achieving far more than you ever did in the past. Go for it!