“Up, Up, and Away” or “It’s All Relative”

So, what’s going to happen in the next episode of this strange financial market?

If you’ve lately checked the headlines of most financial news sources, you’re bound to be somewhat confused.  In a time of extreme uncertainty comes extreme takes on where the market is headed and what actions investors should be doing.  One headline may read, “Get into cash before the market comes crashing down” while another says, “DOW to reach 50,000 in coming year.”  Even for us financial professionals, following the talking heads is enough to make our heads spin.
That brings me to the title of this excerpt.  When I’m reading about the state of the industry, I flashback to one of my favorite childhood cartoons, Rocky & Bullwinkle.  At the end of each episode it would close with a cliffhanger and leave you with two teaser titles for how the next episode will go – one usually catastrophic in nature and the other a much rosier picture.  So, what’s going to happen in the next episode of this strange financial market?
For those bulls thinking this historic rally has no end, there are some lofty, but not outrageous, points being made.  Typically bulls start by stating the economy was rolling before the pandemic hit, so things can keep on going.  U.S. unemployment is currently sitting at 10.2% and destined to improve as things open back up and we inch closer to a presumed upcoming COVID-19 vaccine.  There is also anticipation of yet another stimulus package in the works.  More people employed and more money in their pockets means more dollars circulating in the economy.  Perhaps the biggest variable that may be moving this market in the right direction is the Federal Reserve’s statement in June that it is, “committed to using its full range of tools to support the US economy in this challenging time.”  I’ll reference Marty Zweig’s infamous line from his book Winning on Wall Street, “Don’t fight the Fed.”  The Fed’s ability to print money and keep interest rates near zero is sure to prop up an ailing economic picture.
Now the contrarian investor would immediately state the stark disconnect between market gains and actual economic output.  Much of this relentless run up in the market is fraught with speculation and fear of missing the opportunity to buy while equities were on sale.  The S&P 500 hit all-time highs as of August 18th and is up 52% since hitting bottom on March 23rd of this year, all the while economic output has been terrible, at best.  Many will look at index numbers and say the economy is back, however there is no index for local, non-publicly traded business; market indexes aren’t telling the whole picture.  The latest gross domestic product figures for second quarter of 2020 show a 32.9% decline and a first quarter real GDP decline of 5.0%.  Typically, the market and economy move hand in hand in the same direction.  Occasionally they head in opposite directions, but it’s not usually this extreme.  The contrarian investor would site the disconnect in equity valuations and that stocks are vastly overpriced, referencing the rise in speculation and retail trading by novice investors using apps like Robinhood are driving up prices, with little reason for these company stocks to be increasing in value.  Many millennials seem to be putting life savings into tech stocks.
So, what’s next?  Is the other shoe about to drop or is it clear skies ahead?  The best advice I can give you, is not to speculate and never try to time the market.  The truth is, I have no idea what the market it going to do – ever.  Nobody does.  You’re probably asking how is this helpful? In times of uncertainty it’s important to review your financial plan to address any changes in your life or perhaps your tolerance for risk.  We take a goals-based approach with our clients that factors in the variables of the market.  So as headlines change, your plan for success remains on track.  Remove yourself from the news cycle and give us a call.

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