Market Watch: September 2020

Rick Irwin |

I hope you and your family are well and have enjoyed the summer. Fall is fast approaching and the “new normal” continues as students head back to school, whether virtually or in person, and many people continue to work from home. This has certainly been an interesting period to live through as a global society and there are a few chapters of this tale yet to be written.

Globally, the number of COVID-19 cases surpassed 24.4 million in August as reported by Johns Hopkins University. However, infection rates are slowing in many parts of the world. Although some countries have experienced second waves of the virus, many are in recovery mode.

Many global stock markets have recovered a significant portion of their losses from earlier in the year, while the U.S. market has gone on to set new records. The S&P 500 Index, a broad measure of U.S. stock returns, reached an all-time high in August, following the pandemic-induced downturn during February and March. The upward move marks the index’s fastest-ever recovery from a bear market (defined as a steep price decline, typically exceeding 20%).

It may seem odd for stocks to come back while there is so much economic difficulty and uncertainty. This simply reflects the forward-looking nature of stock markets and the performance of a number of extremely large (and predominantly technology) companies that have done very well despite, or in some cases, because of, the pandemic.

Will these gains hold, or can we expect more volatility? Short-term market movements are impossible to predict. As I have noted before, market declines have historically been followed by recoveries and new highs – much like we saw during August with the S&P 500 and other markets. In fact, most market gains are achieved shortly after a bear market, as shown in the chart below. By staying invested, your portfolio will be well positioned to benefit from a recovery.

Uncertainty about the potential impact of a “second wave” of the virus and the unknown timeframe for the development and widespread use of a vaccine are weighing on investor’s minds right now, and rightly so. Add in racial tensions and the upcoming US presidential election and you can see why some investors may be wondering if they should be taking action and locking in gains now.

Even with all this uncertainty, it’s important to remember that we crafted a well-diversified portfolio that is balanced correctly to achieve your investment goals within an acceptable and appropriate framework of risk. While it’s a totally normal practice to “shift the sails” as market activity moves portions of a portfolio from their respective target weights, and there are indeed cases where some rebalancing is warranted after very strong gains in a few areas, we shouldn’t need to make any large shifts to try to anticipate and position for what the next few months might bring. Attempting to do so back in February and March when the shutdown was occurring would have meant locking in losses that were only temporary and missing out on one of the strongest rebounds in history (looking to the US, which was up over 50% in less than 5 months.)

That said, for our clients taking income regularly, now might be a good time to look at topping up the cash reserves inside your portfolio, to provide adequate funding should the markets become more volatile in the months ahead. Typically, we recommend a full year’s worth of income needs in cash or a very low risk investment and another 1-2 years in lower risk investments also. Similarly, if you have any expenses coming up you might want to look at cashing in some investments now while things are relatively high.

Other than that, just as it did back in March, my advice is to continue to stay invested in your custom, diversified portfolio. If recent history is any reminder, it’s time in the markets, not timing the markets, that matters.