Life has felt far from normal over the last several months as the world has battled the COVID-19 pandemic.
Various measures and guidelines to encourage social distancing that have widely been used to help slow the spread of the virus have resulted in schools closing, most live events being postponed and many people either working from home or not being able to work at all.
It has been an at times surreal, disconcerting experience for just about everyone, and the economic impacts have been real and undeniable. Unemployment has spiked, and both the Federal Reserve and U.S. government have taken swift action to step in and shore up the economy.
Not surprisingly, the investment markets reacted in dramatic fashion, with the S&P 500 Index, which comprises large U.S.-based companies, dropping by nearly 35% from its peak before reversing course. Uncertainly was high, people were scared, and many let that fear guide their investment decisions.
And yet, just a few short months after touching the low point, the S&P 500 Index has recovered most of its losses. It’s not because of a miracle cure for Covid-19, because the virus went away or because the reopening of state economies has gone smoothly.
It is because long-term perspective returned to the markets.
Throughout the months of March, April and May, I spent many hours either on the phone with clients or working to proactively send out information that I hope helped to frame this completely unique time with some long-term perspective. Having been a financial adviser when the dot-com bubble burst, during the horrific events of Sept. 11 and through the fear and uncertainty of the Great Recession, I’ve experienced bear markets before, and I’ve seen the other side when worry subsides and the markets have recovered.
In short, my experience gives me a perspective I sought to share.
There are many factors that go into how the stock market moves, some of which are based on emotion and uncertainty and others that are based on data and fundamentals. And while stock prices can and do move based on both, the stock market is generally forward-looking, and attempting to determine what a company’s earnings will be over many years, not just this quarter or even this year.
While we don’t yet know what the full impact of COVID-19 will be, we do know some important things now that we didn’t know when the stock market first fell based on the fears about it.
We know that the best and brightest scientists all around the world are focusing their efforts on the things we need to transition back to a more normal life – proven treatments for those that come down with the virus, more widespread testing and contact tracing to allow us to better isolate on a case by case basis rather than society as a whole and a vaccine that will help reduce fear of exposure.
Short term, we know the economic impact of COVID-19 has been severe, but investors with a long-term perspective are pricing in the expectation that science will eventually allow the virus to be better controlled. When that happens, the economy could potentially benefit from the tail winds of all of the liquidity and stimulus that has been pumped into it, along with the historically low interest rate environment.
And if you are valuing a stock based on expectations for many years’ worth of earnings, then the case can certainly be made that many stocks were selling for quite a bargain price when they bottomed this spring.
As we move forward, my experience tells me the stock market may become overly complacent and build in expectations that are too optimistic. Just because it has recovered does not mean that it could not decline again, especially if uncertainty rises.
This pandemic is not yet over, and with the insecurity it causes, I suspect we will continue to see volatility in the investment markets. But I have faith that society will find a way to deal with COVID-19 and that our economy will recover over time.
As investors it is important that we retain a long-term perspective and make thoughtful, rather than emotional decisions.