Back in December, on the brink of a new decade, our Considerations outlook suggested thinking in terms of decadal changes-- that each decade has its unique hallmarks and that we’re on the cusp of something new. It’s quite clear already that the 2020’s will have a unique set of hallmarks.
At the end of 2019, the US economy was adding to its record-breaking length while still being among the least potent of any prior expansion. Lurking under the expansion, warning signs of recession were bubbling up. Yield curve inversions. Lofty valuations. More challenging profit results. Like the dry, hot hills of California in September, all that was needed was a “trigger.” We didn’t have to wait long.
The trigger’s been pulled. The party’s over. A global catastrophe is unfolding.
Those of us whose main concerns are how and when to grocery-shop, to mask or not to mask, and the condition of our investments, should count our blessings. It’s almost embarrassing to write this stuff when millions are trying to figure out how to pay the rent and remain food secure.
But we press on and give you your money’s worth. What should we expect with the investments?
Fixed income
Let’s start with savings accounts, CDs, and bonds of all kinds. As this chart clearly shows, yields on everything slid below 1% for the first time ever in March.
Two points to make here:
1. Fixed income yields collapsed as investors bought bonds in a rush to safety. They aggressively became more interested in the return of their money than the return on their money. But this was not sudden. Yields had been shrinking since the fall of 2018! Bond traders were sniffing out recession markers well ahead of time.
2. Yields have risen a bit since March to no better than 1.5%, more or less. If you can find a place to get 1.5% on your money, take it. That’s as good as it’s going to get for a while. You might recall that similar conditions persisted for eight years from 2008-2016.
Know that current yield is the best indicator of future returns. One-and-a-half percent, less taxes and whatever inflation number you want to use leaves no “real” return.
So, why hold any fixed income investments at all?
Because you need a checking account to make transactions and pay bills, a reserve or emergency fund to get through unexpected tight spots, and as that firewall you keep against stock market volatility. These days, fixed income is more like insurance than an investment.
Moving on to stocks.
This story has been all over the news, so highlight reels are unnecessary. Suffice it to say we're “stuck in the middle,” with clowns to the left and jokers to the right. Or clowns up above and jokers down below. Here's what that looks like:
The upper blue line marks the February peak. The lower blue line marks the March low. The depth
(35%) and quickness (less than five weeks) of the move made it an unprecedented (there’s that word again) stock market event.
Vigorous debates rage over whether a new high above the February mark can soon be attained, or whether the March lows will be sliced through to the downside. Nobody knows for sure. It'll depend on whether there are more people who want a chance to sell at the top or buy at the low. We do know that what people say they will do is rarely what they actually do. We'll have to wait and see.
(35%) and quickness (less than five weeks) of the move made it an unprecedented (there’s that word again) stock market event.
Vigorous debates rage over whether a new high above the February mark can soon be attained, or whether the March lows will be sliced through to the downside. Nobody knows for sure. It'll depend on whether there are more people who want a chance to sell at the top or buy at the low. We do know that what people say they will do is rarely what they actually do. We'll have to wait and see.
To continue with the “nobody knows” point, consider the graphic below. It shows 14 major drawdowns (that’s jargon for market declines) that have occurred, and how they developed over a five-year period. We're in the 15th such event-- the red line.
Using this history as a guide, the next 24 months seems to hold equal chances for range-bound chopping around as well as slippage below the March low. But things that have never happened before happen all the time.
Beyond 24 months, history points to much better outcomes. By the way, that droopy track on the lower part of the chart was the 1929-1934 period. We think it's safe to discount that one.
What then, does one do?
We covered this fairly extensively back on March 21st…two days before the March low. Let's summarize:
➤ It’s natural to want to “do something.” We like Jack Bogle’s suggestion: “Don’t just do something, sit there.” Doing something is the result of our emotions convincing us we know the future. We don’t.
➤ A key part of your financial plan is to hew to an asset allocation that balances the occasional terror of price volatility with the regret for not realizing your life goals. Market shocks are temporary, short-term, and reversible. Legendary fund manager Peter Lynch said, “The secret to successful investing in stocks is not to get scared out of them.” Your real risk is about whether or not you achieve your goals.
➤ The planning process is built on prudent assumptions and non-heroic human-scale actions. It’s easier to step over puddles than traverse vast oceans.
➤ Increase your contributions to workplace savings plans and invest them aggressively. That's code for "bite into stocks."
➤ Have a comfortable stash of accessible, liquid, reserves. That's code for Cash.
➤ And here’s the really great news: Every bear market, without exception, has set the stage for an eventual advance to new all-time highs.
Don’t let sheltering-in-place and social distancing keep us apart. Email, the phone, and Zoom work just fine.
Jim Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
