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Keep a Long-Term View

Even with recent declines, the stock market continues to be near record levels while the US is in a recession.  We have seen a disconnect between the expected future valuation of the companies in the stock market and the likely tepid recovery from our current economic slow-down.  From an investing perspective, we recommend that our clients continue to follow their long-term plan albeit to favor a slightly more conservative allocation.

On March 23 we published a letter, “Well, that was a week!” , advising our clients to be patient and not stray from your long-term investment objectives after the market sell off caused fear among investors.  We also counseled that human emotions often lead us to make impulsive investment decisions. Our advice was prudent at the time, as maintaining exposure to stocks in March allowed investors to participate in the historic rebound of the market.  Since the low on March 23, the S&P 500 advanced 50.1%, the biggest 100 day rise since 19331.

The guidance we provided in March is still valid in the current exuberant market conditions. From our perspective, it seems the forward-looking stock market is anticipating a faster economic rebound than we expected.  Currently, the economy is in the largest slowdown since the great depression 2:

  • 2 million American workers are receiving Unemployment Insurance 3
  • 2nd quarter GDP declined at an annual rate of 32% – the largest drop ever recorded since measurement began in 1947 4
  • Restrictions on gatherings and business openings remain in place in most states

The stock market seems to be operating in an alternate reality, at least for the portion of growth stocks that are driving the market higher.  The S&P 500 is up 7% for the year with the tech-heavy NASDAQ up 28%, both close to all-time records.

  • Apple became the first company ever to have market capitalization over $2 Trillion dollars, doubling in value within two years 5.
  • Until today’s 20% decline, Tesla’s stock valuation quintupled from a low in March to over $400 billion, making it worth more than either Walmart or Johnson & Johnson 6
  • Amazon increased in value by 82% this year and is trading at 133 times earnings

Given the disconnect between what appears to be an overly enthusiastic outlook by stock investors, our advice from March remains the same:

  1. Do not stray from your long-term investment objectives. Achieving important life goals requires a steady hand.
  2. Recognize that the stock market’s long-term trajectory is up, even though it never moves in a straight line. There will be years when the market is up and others when it declines.
  3. Understand that your emotions may lead to poorly timed investment decisions. We all have feelings and tend to become overly pessimistic when the market goes down and optimistic when the market is climbing higher.

 

As investment professionals with decades of experience, we have experienced all different market conditions. From what we have learned in the past, the best approach to building and maintaining your wealth is keeping a steady course and not reacting to short term moves in the market.

We are always available to discuss your investment allocation and how it fits into your long-term plans.

 

 

Notes:

  1. Market Watch
  2. Reuters
  3. Department of Labor 
  4. Forbes
  5. CNBC
  6. Fortune