John Gorlow
| May 08, 2020
April was a temperamental month filled with swings in investor mood and sentiment. And despite a blockbuster performance by stocks, it was a month filled with anxiety. How can we go about our day-to-day lives while bracing ourselves for further volatility? We offer our perspective here.
The S&P 500 returned 12.82% for April, its best performance since January 1987. The MSCI All Country World Index returned 10.71%, its third best performance on record. These returns came against a backdrop of terrible economic news. In Q1 2020, as the coronavirus swiftly shuttered much of the economy, U.S. National Income shrank at its fastest pace since the great financial crisis. Gross domestic product contracted at an annual rate of almost 5 percent. More recent data show the economy falling off a cliff. With U.S. jobless claims topping 30 million, the Congressional Budget Office is projecting an unemployment rate of 16 percent later this year. That may be too low.
Despite the collapse in economic activity, the S&P 500 shot up 27 percent from its low point on March 23 to the end of April. Stock prices are more or less where they were last fall, when, despite some troubling indicators, the economy was on a roll. The Financial Times and other publications offer similar explanations for this swift turnabout. It is partly due to extremely aggressive actions by the Fed, which stepped in to buy an unprecedented volume and range of assets to stabilize the system. It can also be attributed to the fact that markets are future-looking. As investors digested news about the severity of the virus, stocks tumbled. As they refocused on economic improvements when lockdowns end, stocks rose.
What comes next in this unfolding drama? “The outlook for long-term growth will depend largely on the speed and strength of the economic recovery,” the FT reports. But the speed and strength of the economic recovery could be torpedoed by any number of unknown factors: how and when lockdowns are lifted, a possible resurgence of disease, holes in supply chains, unexpected events that rock or lift the markets, and a host of other unknowns. And yet at some point the economy will recover, the virus will be controlled, people will go back to work and spend money. A new normal will emerge from the ashes.
There is no way to see the future or how it will unfold. We want certainty, but we aren’t going to get it. So we “try to convert uncertainty into risk with known possible outcomes and probabilities that we can estimate,” writes Arthur C. Brooks in The Atlantic (23-April 2020). We're drawn to endlessly available information and financial data, “watching 24-hour news channels where hosts interview people with only marginally more knowledge than we have. We scour the internet for predictions. We look at the Dow Jones Industrial Average as if it were the zodiac. Surely, we think, if we just knew enough about something, we could accurately assess how much we're at risk.” All of this, Brooks suggests, is an exercise in futility, because the information we have about the coronavirus is incomplete.
Remember too that the media’s role is to hijack our attention. It thrives on clicks, eyeballs, and our Pavlovian response to return again and again to refresh the screen. The media does its best work when there is something to get all worked up about. And when there’s not, it will still manage to remind us of the worrisome thread or trend that we missed. But gorging on the news will not decrease our uncertainty.
We don’t know what will happen tomorrow, next week or next month—and this is always true, not just during pandemics. But here’s what we do know, says Brooks: “We are alive and well right now, and we can refuse to waste the gift of this day.” Don’t let anxiety rob you of this moment. Don’t let fear affect your ability to think critically.
The philosopher David Hume said we need to provide room for doubt and for not knowing. We need to live with risk, some knowable and some unknowable. This is the nature of investing, and it is the fundamental rule for participating in capital markets. At times it can be frightening. It is also an opportunity. That said, the investment decisions we make in coming weeks and months could have a magnifying impact, for better or worse, on our future wealth. If you still haven’t found peace of mind, cashing in some of the gains since March may make sense. If you have questions or concerns about your portfolio, please do not hesitate to contact me. I am here to help.
Regards,
John Gorlow
President
Cardiff Park Advisors
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