What is occurring in the world this year is unprecedented, and it goes without saying that this too applies to capital markets. We have been in a state of constant change since mid-March. While the global economy is in recession and over 27 million Americans are receiving unemployment benefits, the U.S. stock market went from an all-time high to a bear market in record time, and it’s now attempting to recover those losses.
The journey taken by the market thus far in 2020 is one history will remember. The S&P 500 Index reached an all-time high on February 19 of this year. Shortly thereafter, the world went into lock-down, an unimaginable change to our daily lives to fight the worst global pandemic in over 100 years. That reaction triggered the fastest drawdown in the market’s history with the S&P 500 Index declining 34% before reaching a low on March 23. That ended the second-most productive bull market in our country’s history, where the S&P 500 generated a cumulative total return of over 500% from its March 9, 2009 low to the peak in February 2020.
While this is good perspective, investing is about the future, not the past. The most successful financial plans maximize outcomes by investing in high-quality, diversified portfolios that reap the long-term benefits of growth, innovation, economic productivity, and global capital markets. The longer your time horizon, the lower the risk is of losing capital despite our fixation on daily news, developments, and opinions.
Here are a few key themes to keep in mind as we begin to re-open our country.
Diversification is Not Dead
The S&P 500 Index has been the place to be since the global financial crisis bottom on March 9, 2009. Investing in other equity asset classes produced lower returns than the S&P 500. It’s easy to believe that this will continue indefinitely. However, this has not always been the case. Returns were essentially flat from 2000-2009, the period many coined as the “lost decade” for the S&P 500. If history is any indication, the time will come when other asset classes will lead. It’s worth noting the current S&P 500 composition. The tech sector now represents nearly 26% of the index, with much of the run-up due to a few tech names like Apple, Google and Microsoft with lofty price-to-earnings ratios.
Monetary and Fiscal Policy Will Continue to Support Stocks Globally
Swift action by central banks around the world provided support to the economy and global capital markets. The Federal Reserve recently indicated that it will continue to do everything in its power to inject liquidity and remain supportive during this time. Actions by the Fed and other central banks around the world have been much more significant this year than they were in 2008-09 during the Great Financial Crisis. Most recently, the European Union announced the issuance of a common bond that is designed to share risk among all EU countries. This will help create a better functioning monetary union which should support risk assets and banks in Europe.
The Election Season and Its Outcome Will Create Market Volatility
Election years come with major uncertainty. Things will change—yet again—after November, regardless of the outcome. We expect either winner to leverage the rapid change occurring in 2020 to implement policy changes with long-lasting implications. The world is changing. Regionalizing supply chains, leveraging technology to enable ongoing remote work and living, and putting Americans back to work will require special attention. Focusing on infrastructure and additional stimulus will be front and center for both major political parties in the U.S., as will the potential for increased scrutiny and regulation of big tech companies. Let’s not forget a national deficit in the U.S. of approximately $25 trillion and a Federal Reserve Balance sheet valued at over $11 trillion. Solutions to these issues, or lack thereof, will have a significant impact on inflation, consumer behavior, and public/private partnerships. New winners and losers will emerge during this paradigm shift. We should expect market volatility to continue as we sort through all of these issues.
Expect Lower Equity Returns Over the Intermediate Term
According to BCA research, from 1983 through 2019, global equities compounded at an annual rate of return of approximately 10.3%. The key to this time frame is the starting point. The price-to-earnings ratio for stocks in 1983 was 10x, and the yield on the 10-year Treasury was 7%. Today, the U.S. Treasury yield is 0.70%, and bond yields around the world are near or below zero. Couple that with the massive monetary and fiscal spending highlighted above, and equities should outperform other asset classes. However, outperforming doesn’t imply historical rates of return. The price-to-earnings ratio for global stocks is now 17x. Based on Evercore ISI estimates for the S&P 500 earnings of $145 per share in 2021, the forward-looking PE for large U.S. companies is currently 21x—not cheap compared to the long-term average of 16x. Neither stocks nor bonds are at a good starting point to repeat the returns of the prior 37 years. Many expect equities to earn single-digit returns that modestly exceed inflation.
All of this uncertainty and volatility is yet another example of how unpredictable the market can be in the short-term. Back in April, we highlighted the danger of changing your long-term asset allocation by moving to cash while you wait for the storm to pass. That’s proven true much quicker than we expected as equity markets have performed handsomely since early April and markets have moved well in advance of the expected economic recovery. As we wait for the economy to recover, we will remain diligent in identifying investment opportunities to help you achieve the goals set forth in your financial plan.
If you have questions about recent market performance or would like to review your current portfolio, please reach out to our Curi Capital’s Wealth Management team at 984-202-2800.
This commentary is for informational purposes only and is not intended to be advice of any kind. The information contained herein is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.
The sources mentioned in this commentary are considered to be reliable, however we do not guarantee that their information is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.
 Source: U.S. Department of Labor, Unemployment Insurance Weekly Claims 5/21/2020
 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
 Source: Bloomberg
 Source: Strategas
 Source: BCA Research
 Source: TreasuryDirect.gov 06/02/2020
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