Last week the S&P 500 surpassed its previous record high, set in February, almost exactly six months ago. This high was just before the coronavirus crisis began in earnest here in the United States. The rebound from the March lows makes this year’s selloff the shortest bear market in history. As the market has soared and the presidential election looms, we’ve received a number of questions from our clients who are wondering what to expect later this year. Below is a summary of our responses to the three questions we are hearing most often.
1. Why has the market recovered so quickly?
The strong market performance in recent months can be attributed to two important factors. The first is that the federal government and the Federal Reserve rushed in providing an unprecedented amount of fiscal and monetary support to families and businesses necessary to help them get through the worst of the coronavirus shut-downs. These measures appear to have worked well so far. The second important factor is that the market is always looking forward. Although the crisis has negatively affected the economy and corporate profits in the near-term, most expect the worst of the impact to be short-lived. Looking out to 2021 and beyond, earnings are expected to return to pre-crisis levels and continue to grow from there.
Further, the stocks that have led the market’s growth were well positioned to respond to the crisis and these companies supported efforts required to adapt to this new environment. So, technology companies such as Apple, Microsoft, and Google were prepared to handle the emerging needs of those working from home. Companies like Amazon, Costco, and Wal-Mart did their part to provide us with the things we need when needed and to respond to disruptions as they occurred. The crisis has served to accelerate changes in our economy that have been underway for quite some time.
2. Will federal spending cause inflation?
There is a growing concern that the massive amount of federal spending deployed to stave off the economic consequences of the coronavirus will eventually lead to higher levels of inflation. So far, what we’ve seen in that regard has been a decline in the dollar versus global currencies and a terrific rally in the price of gold, which recently topped $2,000 per ounce.
Although economic theory suggests that an increase in the money supply will lead to higher levels of inflation, there are many examples where this has not occurred. For instance, in response to the 2008-09 financial crisis, the government injected unprecedented amounts of fiscal and monetary stimulus. Many expected higher inflation to follow, but it never materialized. In fact, the core inflation rate in the U.S. has remained below 2.5% for the past decade. This compares to the long-term average inflation rate of about 4%. There is certainly the potential for higher inflation in the future, but so far there isn’t much evidence that it is happening now or will occur in the near future.
3. Will the market fall if (Blank) wins the election?
This question comes up during every presidential election cycle. And although it seems to defy logic, elections typically do not have very much impact on the stock market over the long-term. The economy has both prospered and struggled under the leadership of both parties throughout history. We can expect a short-lived “knee jerk” reaction around the election regardless of the outcome, but usually there has not been a lasting effect.
In this election, the common concern is that a win by Joe Biden will lead to higher taxes, hurting incomes and corporate profits. While this may be a part of Biden’s campaign platform, there are a lot of variables involved before changes in the tax laws can occur. First, he needs to win the election. Second, he’ll need the support of Congress. Third, they’ll need to have confidence that the changes will not damage an economy that is already weak from the coronavirus crisis. That is a lot of “ifs” to overcome. Said another way, it is not uncommon for politicians in general to make a lot of promises on the campaign trail that never actually come to pass.
If there is one lesson that has been strongly reinforced this year, it has been that there is no way to know what will happen to the markets in the near-term. Looking back to late-March, the economic outlook was quite bleak. Five months later there still is no end in sight for when things will return to normal, and it appears we will have to muddle along in this “new normal” of living in pre-vaccine purgatory for the foreseeable future. But even if we could have predicted with perfect clarity all that has transpired, we never would have guessed the market would be back to all-time highs so quickly.
We are reminded once again how difficult it is to successfully anticipate what will happen in the future and also to predict how the market will react. We believe the most important factor to long-term success is choosing an appropriate plan for saving and allocating your portfolio accordingly, and then stick with your plan through the market’s inevitable twists and turns.
Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who would like help planning for their financial future, we will be pleased to speak with them to see if we can assist.
Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.