COVID-19 hit the stock market hard.
A little over six months ago, WRP held a webinar for all our clients to discuss the state of the market. It was bleak indeed. COVID-19 was raging all over the world, and many places had commenced shutting down. It got worse. On March 20, California became the first state to institute a shelter-in-place order. Most companies could no longer do business.
On March 16, the S&P closed down nearly 13% for the day, the third biggest drop in its history. The S&P500 didn’t see the bottom until March 23, when it was down 34% peak to trough. The other parts of the global markets also took a bath with the Russell 2000 dropping 38%, foreign markets (EAFE) down nearly 33%, and the small foreign markets (EAFE Small-Cap) down 38%.
Some markets rebounded quickly.
As the market began to recover in late March and April, investors were rewarded for staying disciplined. Some advisors (pause for a moment to gloat) recommended tax loss harvesting and rebalancing. Tax loss harvesting allowed investors to collect losses on their accounts while remaining exposed to the market in case of a rise, and rise it did with the S&P500 hitting all-time highs just months after the collapse.
Many investors, both professional and novice, look at the numbers and can’t make sense of it. After all, the economy didn’t open back up on March 23. To the contrary, most places started locking down even harder. The cure for COVID wasn’t on the horizon. We probably won’t even see a widely distributed vaccine until at least early 2021. If there is no immediate good news, then how could the stock market possibly be up?
One issue is how people define the stock market. The S&P, NASDAQ, and DOW are not the whole stock market. The stock market is comprised of large and small, US and international, and growth and value companies. All of these markets are up since last March. However, not all parts of the stock market have risen equally. After nearly six months of recovery, the S&P was up over 3.5% as of mid-September; however, the Russell 2000 was still down over 7.75%, EAFE down around 10%, and EAFE Small-Cap down 2.5%.
What story do the numbers really tell?
To complicate matters further, not every S&P company is in the black for the year. So, when the media says the market is at an all-time high, that’s not the whole story. What has driven the S&P500’s roaring comeback has been the FAANGM stocks: Facebook, Amazon, Apple, Netflix, Google, and Microsoft. As of mid-September, the FAANGM stocks, as a group, returned 38.4% on the year, while the S&P500 returned 3.2%. If you take out the FAANGM stocks, then the return of the S&P500 falls to -5%.
But how can the stock market still be up from March when the economy hasn’t improved, new stimulus hasn’t been passed by Congress, and the possibility of major foreclosures and evictions loom on the horizon? The market is both a forward-looking and backward-looking institution. At some point, the economy will recover, and people will go back to work. After all, the drop in business was not for lack of real demand; for better or worse, it was crafted by political leaders. The expectation of future profits isn’t as clear as it once was, but it still exists.
Finally, the drop in interest rates has pushed more investors out of the bond market. Remember the good old days when you could get 0.5% on a money market account? Those days are gone and don’t seem to be coming back anytime soon. Investors who had relied upon that cashflow are now trying to use the stock market to gain some of it back.
To assess the position of your portfolio, talk to an experienced adviser. The right portfolio begins with a good financial plan, and the experts at WRP Wealth can help guide and advise you towards your financial success. Additionally, for ongoing financial updates, subscribe to our blog.
