“First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty, we must decide and we must act. And lastly, we need to judge decisions not only on the results but on how they were made.” – Robert Rubin
For the most part, the market trends prior to August continued through the month. Equity index returns were strong across the board, with the world index joining the S&P 500 in positive territory for 2020. Commodity prices, down for the year but stronger recently, moved up more than 5% for the month. The US Dollar Index, stronger at the start of the year, continued to weaken, down almost 2% in August. The notable exception were bonds, with the index down slightly.
U.S. & International Stock Index Returns
|Index August 2020 Year-to-Date|
|Dow Industrials 7.01% (0.38%)|
|S&P 500 7.09% 8.34%|
|S&P 400 (Midcap) 3.03% (6.62%)|
|S&P 600 (Small Cap) 3.27% (11.99%)|
|MSCI World 6.38% 4.11%|
|MSCI EAFE 4.41% (1.18%)|
|Bloomberg Agg. Bond 6.85%|
|CRB Commodity Index (17.53%)|
|US Dollar Index (4.70%)|
All data as of 09/01/2020, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Sometime You Get What You Expect
The trend is the trend until it no longer is the trend. What we mean by this is that markets usually move in one direction over long periods of time. The daily and weekly up and down is just noise. What has happened in the recent past is usually a good bet to continue.
Last month we took note of just how surprising 2020 has been for investors. COVID-19 was not the topic of the day, the economy was moving along, employment was at an all-time high, and people were generally feeling pretty good about both their personal situation and the economy. No thought of a pandemic or the issues that come with shutting down the economy. As we argued, not what investors had expected.
It is important to understand that these big changes in market direction are the exception, not the rule. What has been unique about the first eight months of 2020 has been the quick reversal back to the pre-pandemic trends. This, of course, is a result of the substantial backing of the economy from both fiscal and monetary policies. To say that government actions to prevent a pandemic-induced depression was unprecedented in size would be a huge understatement. Throwing money at the problem seems to have worked.
But that doesn’t mean that the stock market will go higher forever, nor does it imply there won’t be periodic interruptions where the stock market moves lower. The word “correction” is the word used to describe these moves lower during a bull market. More likely than not, a move down is just a blip, not a change of trend. Most of the time the trend is the trend.
What does that mean for the coming months?
One of the most enduring trends in investing is that September is not a good month for stocks. History tells us the S&P 500 (SPX) falls an average of 2.4%, the Dow Industrials (DJIA) loses 1.87%, and the Nasdaq Composite Index (COMP) drops 3.45% for the month. (Source) It should be noted these are average returns and that over the years the divergence in returns has been large. In our opinion, the data tells us to be both cautious as well as open to a wide variety of outcomes in the coming months. More so in 2020, given the unique set of variables that can affect market performance.
We have already discussed the pandemic, but did you know we have a presidential election on tap for November 3? Or what about the S&P500 and the NASDAQ hitting all-time highs? Of course, we would be remiss if we didn’t mention there’s also been a large dispersion between the best performing and worst performing stocks and sectors this year. As of August 31, 2020, the Russell 1000 Growth Index was up 29.53% for the year while the Russel 1000 Value Index is negative 11.01%. We aren’t sure if this is as wide as the spread has ever been, but a 40%+ difference between growth and value isn’t a regular occurrence. Neither is the spread between the S&P500 Energy sector return of negative 41.62% and the positive gain of 34.82% for the S&P500 Information Technology sector. (All data as of 09/01/2020, Source: Wells Fargo Investment Institute)
Our point isn’t to scare you out of your investments – far from it in fact – but to make you aware of the current environment. In our view, all of the aforementioned suggests a period of volatility is likely in the coming weeks and months.
Long Term Perspective vs. Short Term Thinking
As a team Magellan Financial has more than 110 years of investing experience. Put another way, we have seen a lot of stuff. We have talked to investors of all types with most every goal you could ever imagine. We remember the tech run up then “tech wreck” circa 1996 through 2002. We advised clients through the Great Recession of 2008. Some of us were around for the mid-1970s selloff of the Nifty 50, Black Monday (1987), and the 1998 Long -Term Capital Management Crisis. We all have advised clients through run of the mill market corrections. These experiences and client conversations have been invaluable in allowing us to understand the need to think more about the coming years than the coming days or months.
Chart #1 is a long-term chart of the Dow Industrial Average going back to 1990. Over these 30 years the world has changed massively. During this time there were a number of what have been commonly referred to as major sell-offs/corrections/crashes, pick your preferred terminology. Yet at the end of the day, even after the pandemic selloff of earlier this year it is clear the trend over time is higher. The talking heads at 4 pm explaining what happened today and WHY it happened … that’s just noise. That story or what and why is more about gaining eyeballs and selling advertisement space than investing.
Save like a Pessimist, Invest like an Optimist
Our client base is primarily composed of people who are either saving for their retirement years or are currently enjoying their retirement years. The success we have had helping people get to and through a successful retirement comes down to doing a few basic things correctly. The secret sauce isn’t complicated, but the execution of it isn’t as easy as it seems. Why? It takes discipline to not give into our emotions. When things are good it is easy to get greedy; when things are bad its easy to give into our fears.
The successful investor, we have found, will do the following:
Save like a pessimist: The standard advice is that when saving for retirement one should try and save 10% of their income in order to get to retirement with enough assets to live a full life. For some this works, but the truly successful investor will take it one step further. In our experience, the truly successful investors will save as much as they can as early as they can, then keep it up until retirement day. They invest in things of value – a house, education – and don’t overindulge. You need to save for retirement, but also savings set aside for other items like your children’s education, emergency savings, and big ticket items like a child’s wedding. You want to live life well, just well within your means.
As easy as this is in theory, it is so incredibly easy to get off track. Society is designed to make you want to spend more money than maybe you should. We aren’t just talking about the daily stop for coffee and a bagel, but those big-ticket items like a $75,000 truck or the “once in a lifetime” exclusive vacation that you want to take every year.
The successful investor will save consistently for the long-term.
Invest like an Optimist: If you go back to Chart #1 you will see a stock market that move higher over the years. What you do not see in that chart is the changes in the world that have occurred in that time. In 1990 your car wasn’t a moving computer, and your computer wasn’t nearly as powerful as your watch is today. That smart phone in your pocket … only been around since 2007. That tiny startup shoe manufacturer and the mom and pop store from the Midwest have expanded into global behemoths.
Now consider what the next 30 years will look like …
We have yet to meet an investor who has made their fortune by betting against American ingenuity or the stock market. The successful investor has the foresight to understand the world is constantly changing, resulting in new technologies, growth in businesses of all kinds, and the potential to create wealth for those who are properly invested. There is always a reason to own bonds in our opinion, but owning a diversified stock portfolio – either individually or through products like mutual funds and ETFs – is a necessary ingredient of successfully reaching retirement goals.
We enter September with the pandemic still festering in the background. The economic background remains shaky, yet the resilient stock market has managed to reach new all-times highs. Fed Chairman Jerome Powell announced a change in policy at the central bank that seemingly will have interest rates pegged at the current low levels for an extended period of time. All of this is occurring amidst a presidential election that is two months away. To say there is a lot happening at this moment in time is an understatement.
As we stated earlier, we believe that the next few months has the potential to be volatile. How volatile we don’t know. What we can say with confidence is that whatever happens in the coming months, it will pass. In the words of legendary investor Warren Buffett, the stock market is a voting machine in the short term and a weighing machine over the long term. This is important to remember both good times and bad times.
We continue to believe in America and American innovation creating wealth in the years to come. For those of us who are saving for retirement we would say keep your focus on your plan. Keep investing and invest like an optimist. For those who are at or in retirement you too should stick with your plan. Keep your perspective. And if you don’t have a plan, or would like to revisit it for a refresh, we are here to help.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Jeffrey T. Bogert, Partner
Robert I Cahill, Partner Rob.Cahill@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com