Investment Update: May 29, 2020

When will our economy fully re-open?

As the COVID19 pandemic began, the general thought was that we would experience the outbreak and then we would finish with the outbreak.  This would lead to the economy re-opening in a more expedited manner. 

The stay-at-home efforts have saved lives and prevented mass outbreaks yet has elongated the curve so we are experiencing lower infection rates but spread over a longer period of time.

The differing regional COVID statistics will drive business re-opening strategies.  In addition, the judgments of local, state, and federal officials will certainly affect coordination of a full economic recovery.  For example: a final assembly plant in one state may wish to open but a parts supplier in another state may remain closed.  Areas may not completely reopen at full capacity until there is a vaccine available.

What are the markets telling us about an economic recovery?

The markets are forward-looking entities, generally twelve to eighteen months and as of today are generally optimistic about a recovery.  A great deal of our recent market activity is still driven by short-term headlines such as recent positive news on vaccines.  While positive today, we will still see a great deal of volatility ahead.

Where are we with regard to a market recovery?

The Dow Jones Industrial Average had lost over 11,000 points from its peak in February to its low in March, which was a drop of approximately (38%).  It has since recovered more than 7,000 points or an approximate gain of + 38% from its low.   With that said, shouldn’t we be even in relation to the highs in February?  But we are still 4,000 points from the February highs. What is wrong with this picture? 

We have often written about the traps of following the “benchmark industry” and this is one of many useful tools to analyze markets.  We often use the Dow to illustrate market activity.  It is a well-known and familiar market proxy that is a convenient tool to communicate thoughts and ideas.  However, there is much more to understand about the thousands of market benchmarks that exist.

When we attain the highs reached in February, media outlets will trumpet that “we are back”.  This will be a welcome milestone, but our actual investments will not be fully recovered.  Let’s look at the numbers. 

We start today with $100.  We lose $50 which equals (50%).  We start tomorrow with $50.  If we gain the same percentage that we lost which was 50% of our now $50 we only have $75.  50% of $50 equals $25.   So, we actually need a 100% gain from $50 in order to reach our original $100. 

It is a trap within investor psychology to peg financial success on a point in time or a particular peak in value and that in some way is what we deserve.  The markets and our portfolios will always fluctuate.  Our focus should be on our personal life goals and how proper long-term planning can help achieve those goals.  We have managed portfolios throughout many historic events and as long as you believe in American business and our workers, your investing will be successful.  We have always recovered.

As always please free to all with any questions concerning your investments.

Stay safe and well.