As summer quickly turns to fall, this is a good time to reflect on what was a tumultuous season and consider what comes next. In this newsletter for Fall 2020, we’d like to share with you our latest thinking and planned portfolio changes. Wherever this message finds you, I hope you and those you love are well and your life is starting to feel like it’s getting back to normal.
This summer was unlike any we have seen in our lifetimes. The early part of this year was especially scary when a lot of people felt like our economy was on the brink of collapse. Unlike the recessions in 2001 and 2008 when it felt like our financial lives were at risk, this year, our actual lives were at risk! We personally know dozens of people that had COVID and many had a tough go of it. There were also friends that we lost way too early and we will continue to think about them for years to come.
Today, with kids going back to school, it feels like we have finally stopped holding our collective breath. Not because we have a cure for COVID but because we are learning to live with COVID. My kids have now started to attend school on a part-time and socially distanced basis. I have been really impressed by the precautions the schools have taken to keep the children at a distance from each other. So far, so good. There are no perfect solutions but they will help avoid the large gatherings that have fueled major outbreaks this year. Of course, not every school district will implement these policies but at least the tools will exist. In more positive news, vulnerable people continue to socially distance. Rapid testing that has recently been developed will help slow down a possible second wave. Finally, the medical community has gotten better at identifying and treating those with the most severe symptoms. We are seeing this in Europe this September where cases have spiked but mortality has been stable.
That’s not to say we’re out of the woods. Historically speaking, pandemics and their economic consequences tend to last years (not weeks, as some were claiming in the spring). We wonder how long it will be before the average grandparent is comfortable going to a live baseball game or a person with a pre-existing condition will be able to see a movie. Even with a possible vaccine on the horizon, it will be at least a year and maybe more before things look and feel normal again.
At Longwave, we aim to do two things: protect our clients’ financial future from risk while also helping our clients participate in the long-term upside on the stock market. This year, it’s been a challenge to do both at the same time.
In the spring, as we looked at the risks, we felt that the pandemic would be with us for some time and that the economy would struggle. We also expected the stock market would continue to have swings both up and down throughout the year. Today, we have seen the first two expectations come true: we’re still seeing almost 1 million new unemployment claims each week. Everyday hundreds of Americans are still losing their lives due to COVID.
What we did not expect however is the complete lack of volatility since April. Through the end of August, the market had gone only up. Over the summer we speculated that the reason this was happening was due to extraordinary government stimulus and the fact that the worst fears of the crisis did not come true. Although the economy today is in similar shape as 2008, Americans are still spending and investing, in part because of this government cash. This year, a lot of that cash found its way into the stock market.
With the stock market climbing and climbing, it’s not to say that people are investing in bad companies. It’s just that people may be overpaying for good ones. A good example is Apple which makes my mobile phone and is a very successful and profitable company. Over the last year, Apple actually improved their profitability by 6% which is terrific. However, the stock has been up over 157% in a year. This appreciation means that investors are expecting much more upside in Apple than they were a year ago. Yet the company is still basically the same, and so is my phone.
History has shown that when stocks, bonds, gold and real estate all go up at the same time, there is often a correction. However, because of government support, that correction may not happen for a long time or it could happen tomorrow. Because of this uncertainty, our aim is to get portfolios fully invested.
So far in September uncertainty about the near future is finally starting to show up in stock market volatility. We are hoping to take advantage of this volatility by investing the small bit of cash some portfolios have on the sidelines back into stocks. However, we are also well aware that today stocks may be ‘expensive’ due to government support. This is a challenge, but we feel we have a solution. We have selected a mutual fund that screens for companies with the highest profitability. By utilizing this fund, if the market struggles in 2021, we seek to avoid the more speculative or economically sensitive companies. Additionally, our plan is to shift cash into this fund over a 6 month period to further avoid the risk of bad timing.
But what about the election? During the 2000 Bush-Gore election, we had the Florida recounts and the stock market fell 5%. This election could be even more contentious given that mail in-balloting could cause uncertainty long past election day. Should there be a significant market drop, we will consider accelerating our 6 month reinvestment plan.
So that’s our perspective at this stage. We don’t think we are out of the woods yet but we are hopeful and resilient. People want to travel again, see their grandkids, and get back with their colleagues. People want to start celebrating milestones like weddings and graduations again. I want to take Meg dancing and my kids to Disney World. We are still all waiting to get our lives back but if we can close our eyes, and look beyond the next year or two, I know that we will be OK. Please continue to stay safe and strong.