1st Quarter Client Note – Still Standing

When writing my client note at this time last year, we were in the vortex of the first wave of the Covid-19 pandemic. Cases were exploding around the world. Hospitals were overwhelmed – or nearly so. And deaths were mounting. Social distancing had been imposed. Businesses were shuttered. There were massive layoffs, particularly in the travel and hospitality industries. Congress had passed three pieces of financial relief legislation. The stock market had sustained one of its worst quarters ever. A period of uncertainty as acute as any in my lifetime had begun.

I stopped meeting with clients in the office and became familiar with Zoom and screen sharing. At first, I was skeptical of my ability to deliver quality advice and counsel via bits and bytes; but thankfully I can report that the medium has by and large served my clients well. (I actually had my first office meeting in over a year last week.) And Zoom has its advantages; it’s more convenient for busy (and out-of-town) clients to meet more frequently and it’s easier to share documents via screenshare.

But even for those of us who were fortunate enough not to have tragically suffered, the stress and loneliness of isolation has taken its toll.

The Perils of Prediction

The S&P 500 closed at a record high on February 19, 2020. The following five weeks saw the market drop by 34%, ending the longest bull market ever. It was commonplace to believe that we were at the precipice of the second coming of the Great Depression — and perhaps years of carnage in the stock market. But I cautioned my readers not to panic or make precipitous changes – beyond having a more than adequate cash reserve. And to practice humility, kindness, gratitude and sacrifice. All of which has paid off – as the economy, the markets (by August, 2020 the S&P reached a new high and kept going from there.) And our psyches have begun to recover, as well.

In retrospect, by virtue of its brevity, the Covid-19 crash was among the historically least painful in Morningstar analyst Paul Kaplan’s pain index. That sure didn’t seem likely at the time.

It remains to be seen what the long term economic and cultural changes from the pandemic will be. Work, travel and dining habits will have changed – at least temporarily. But it would be folly to base any fundamental investment strategies on such predictions – either your own or those of so-called experts.

Equities Up – Across the Board

Every major equity class had a positive quarter. The S & P 500 (Total Return) Index gained 6.17% and is up 70% from the bottom on March 21, 2020.

We are beginning to see some pause in market leadership by the so-called FANMAG large-cap growth technology stocks that are at valuations nearly equal to the 1999 technology bubble. And a bit of a quickening in long suffering value and small cap stocks. The Russell 1000 (Large Cap) Value Index gained 11.26% and the Russell 2000 (Small Cap) Value Index gained a remarkable 21.17%. Value and small cap also outperformed in international markets.

It’s nice to see the patience of value investors finally rewarded – even if only temporarily. It continues to be a good idea to rebalance away from the high fliers and into areas of the market that may not be so richly valued.

Our friends at Dimensional Funds sum up the data in their Quarterly Market Review.

Interest Rates Up – Bonds Down

Bonds, on the other hand, suffered a terrible quarter; driven by the rate on the benchmark 10-year Treasury note nearly doubling; rising 81 bps, from .93% to 1.74%. The Bloomberg Barclays US Aggregate Bond Index fell 3.37%. This, despite the Fed maintaining short term rates at historic lows. Clearly, the bond market is anticipating higher economic growth and possibly some inflation.

Back to (the New) Normal?

The economy is forecast to achieve substantial GDP growth in 2021, perhaps as much as 7%.

And some things are getting back to normal. But significant open questions remain for investors. Will fiscal stimulus and economic growth lead to a long period of secular inflation and a prolonged bear market in bonds? Or will there just be a relatively short term rise in prices as the economy picks up slack and then revert to the low inflation environment we have been experiencing for the past few decades?

Nobody knows, of course. Which is why it is crucial to have a financial plan and an investment strategy that will work in either event.

It is difficult to know how much of the market’s resilience is fueled by speculation and how much is reasonably based on fundamentals. And with the market again at all times highs; as ever, it pays to make sure your asset allocation stays in line with your need, willingness and capacity for risk.

Reemergence and Reevaluation

While not exactly like the billions of Cicadas in Brood X making their 17-year appearance, people are beginning to emerge from our year-long cocoons. But many of us are feeling anxious about resuming our social lives.

There are many enduring lessons from 2020 and the pandemic. Among them:

  • Spending money isn’t only way to fulfillment.
  • Paying attention to hygiene and distancing may pay off and keep you from getting sick even in “normal” years.
  • Keep in touch with your friends and family even if you can’t get together.
  • Don’t panic when it comes to investing.
  • Maintain a sufficient cash reserve.

And, most importantly: You only live once. Give it your best shot!

There’s an old saying: While you are planning, God is laughing. Whatever plans you made heading into 2020 were undoubtedly thrown off track. All of which suggests a bit of a modified approach to planning:  Build in frequent check-ins and have preplanned possible course corrections to account for the inevitable curve balls life throws at you. Even if you don’t have such a plan, it’s not too late to formulate one.

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