Even Keel

On March 23rd, the S&P 500 hit an intraday low of 2191, which represented a decline of roughly 35 percent from its peak of 3393, reached just a few weeks before. As the seriousness of the Covid-19 pandemic and its potential economic fallout began to sink in, the markets, and subsequently, the financial news media, went into full-on panic mode, and the decline, while not record-breaking in its depth, was remarkable for being the quickest such decline in the history of the markets.

One week after the low point in the market on March 31st, I wrote a blog called “And This Too Shall Pass” (https://td-wm.com/node/1891). In it I talked about the state of the markets, and the media coverage associated with it. The basic message was that despite the serious nature of the pandemic, and the inevitable pain it would cause in the broader economy, for the vast majority of investors, particularly those with a well-thought-out financial plan in place, it was imperative to stick to their plan, and not make emotionally-driven investment decisions based on short-term events. Because eventually, this moment would pass, and things would return to some sense of normality. The idea that ‘it’s different this time’ is a difficult one to ignore, especially while in the early stages of a global pandemic, the likes of which none of us has ever seen before. But it was our assertion that it’s always different in some way when markets are in turmoil, yet it is always the same in many ways too. And because of that, by using history as our guide, the best advice is always to stick to the plan, and try to tune out the chorus of doomsday predictors. This is what we do, and it’s what our clients require of us: to keep them even keel in the face of a stampeding herd.

Fast forward to today, and the S&P 500 sits roughly 4-5% below that all-time high reached back in late February, after a rebound almost as sharp and quick as the decline that proceeded it. Good advice, right? Well, yes, but not because the markets rebounded so quickly. The truth is, we had no idea the markets would rebound so quickly, and we would be the first to admit that. It was good advice because, in attempting to achieve steady long-term returns, investors need to be prepared to ride out different types of markets, through all market cycles. As we so often say, “it’s time in the markets, not timing the markets that counts.” It was good advice because history shows us that the pendulum swing of the markets always tends to move too far in every direction, though it doesn’t tell us how far, how long, or what the catalysts for the swings will be. And just as we didn’t know the rebound would happen the way it did this time, during the previous ten years, we also didn’t know – as the markets marched steadily upwards in the aftermath of the great recession, and we constantly reminded clients that at some point a reckoning was coming – when, how far or what the catalysts would be.

And so now, as we sit back up near all-time highs, we feel it is imperative to remind everyone to be vigilant. To not get complacent. This pandemic is far from over from our perspective, as case counts in the U.S. continue to rise. Millions of people are out of work, and entire industries are in limbo. And while we are regularly compelled to explain that the markets are not the economy, there are most certainly serious issues facing our economy which could easily have negative effects on the markets in the future. That’s not to say that we will definitely take out or even re-test the previous lows we saw in March. Again, we really don’t know. It does seem as if there’s a bit of a disconnect between what we’re seeing in the real economy, and what’s taken place in the markets over the past few months; but as I explain to clients all the time, the markets are a forward-looking discounting mechanism. That’s just a fancy way of saying that the market as a whole is more interested in what the future holds than in what happened in the past, or even what is happening right now. So it’s possible that the pendulum did swing too far in March, and now has swung too far back.

In the end, only time will tell. The point is, that just as we didn’t want to get panicked in March, we don’t want to get too complacent now. As Jarrett likes to explain to everyone, “When the market is up, I’m the voice of doom. When it’s down, I get out the pom-poms and I’m the cheerleader.” Staying on an even keel during all cycles is what we believe is the key to long-term success. You often hear professional athletes at the highest level talk about not getting too high in the face of victory, and not getting too low in the face of defeat. It’s what allows them to stay level-headed and perform even under the most stressful circumstances. This is instructive for investing as well, since avoiding emotional, knee-jerk decisions in the face of distress or euphoria is what tends to make the difference over the long-term. That’s why, just as it was important not to get too down back in March, it’s equally important not to be too satisfied now, so that no matter which way the pendulum swings next, you’ll be prepared to ride it out and stick to your plan.