December 2020 | Victoria Bogner, CFP®, CFA, AIF®
We’ve finally made it, the last month of 2020. Back in March, it seemed like the world was ending. We were experiencing the worst economy decline since the Great Depression. December was light-years away. But here we are and we’re still standing upright. We’re ready to say sayonara to this calendar year and head into the next with (hopefully) renewed perspective, gratitude, and a pattern of navigation through this “new normal” we all find ourselves in.
It’s a bit ironic, isn’t it? When the market was going down precipitously in February and March, investors wanted nothing to do with stocks. Now that the major indices have hit new all-time highs, investors again want nothing to do with stocks. The market can’t win for losing, it seems. There’s never a “right” time to invest. There’s never a time that feels good. In the words of Brian Portnoy, successful investing is painful. As painful as it is to buy as the market is falling apart, it’s painful to buy at the top also. Is now really a good time to invest? With the market at all-time highs?
Let’s put this into perspective. Yes, the market has had an incredible rally off of the March 23rd lows. But pull back the lens a bit.
Here is a one year graph of the S&P 500. Every bar represents one day. Yes, we had a huge drop in February and March followed by a swift recovery, but when you see past that, the gains we’ve experienced this year aren’t out of line.
“But what about COVID, negative GDP, recession, political unrest, unemployment, and (fill in the blank of your biggest fear here)?” some ask. I know of several investors that moved to cash in March because in their minds, there was no possible way this wouldn’t be a market catastrophe on par with the Great Depression. They’re still waiting for that second shoe to drop. In my opinion, it’s an exercise in futility. I don’t think we’ll see those March lows again. And here’s why.
Forgive me if I’m repeating myself from prior commentaries, but this is one of the most important lessons in investing. If you can understand this, it will save you a lot of pain and mistakes. What you have to understand is what really matters to the stock market. And despite what your intuition (or the news) is telling you about how bad things are, you have to look past that toward what’s going on under the surface.
Many things matter, but two things top them all: interest rates and liquidity. I’ve said this in the past but it’s worth repeating. Trust me, I used to be firmly in the fundamental valuation camp. I believed in mean regression. Like a rubber band, you can stretch one or two standard deviations from the average, but sooner or later, we’ll snap back to average. If the S&P 500 is trading for 1.5 standard deviations above its 20-year average, common sense would say it’s overvalued. And why would someone invest in something trading for more than its worth?
Here’s the fallacy in that thinking. It assumes that everything else stays the same. If interest rates, liquidity, debt, consumer spending, GDP and earnings were all at a stable growth rate for the past 20 years, then and only then could we say that an index is under- or overvalued.
But those things haven’t stayed the same. We now have record low interest rates, low consumer debt, high government debt due to stimulus, consumer spending that has shifted to different locations, negative but rapidly improving GDP, and a bifurcation of earnings (some sectors are booming while others are languishing).
When we factor in the shift that has happened in the factors that matter, we can then make an educated guess on where the market may go over the next 12 months or so. And with near 0% rates and a firehose of money that more than makes up for GDP loss, it’s our opinion that the S&P 500 could see double digit returns in 2021. Of course, that does mean smooth sailing. We still think the market will create some sea sickness among all but the most experienced of sailors. And as we’ve all acutely experienced in 2020, the unforeseen can and does often happen. But from where we sit now with the information we have, our call is for a positive 2021.
Back to that question of whether or not now is a good time to invest. I would say yes, but not blindly. Our investment strategy is to use as many tailwinds to our advantage as possible. What does that mean? It means we find the sectors that are showing a strong trend in comparison to the broad market, and we purchase securities that are showing strong trends compared to their strong sectors. We purchase what institutional investors are accumulating. We stick with companies that have beaten their earnings and raised guidance. We stay away from companies and sectors that are languishing and showing no consistent momentum or investor support. Don’t try to catch falling knives, and don’t try to time the bottom of a bad stock. The secret of making good returns in the stock market isn’t to buy low and sell high. It’s to buy high and sell higher.
May your Christmas be merry and bright, and may your New Year be full of new possibilities.
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Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Advisor. Advisory services also offered through Affinity Financial Advisors, a Registered Investment Advisor, operating as McDaniel Knutson Financial Partners. Cetera is under separate ownership from any other named entity.
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