My wife and I disagree on who will win the presidential election in November. In fact, both of us are so sure about our prediction that it has us wanting to make major changes to our retirement portfolio. The funny thing is, our different predictions, based on our best guesses, both result in market chaos. Do you think we should sit October, November and December out of the markets and give it another go in 2021?
Congratulations on succinctly capturing the collective sentiment of hundreds of millions of Americans, Catherine. I, too, am concerned about what I believe to be an inevitable level of chaos, which only the year 2020 could muster.
Questions like this are difficult to answer, because at no point in time am I ever going to recommend a person time the market on the buy side or the sell side. That being said, let’s look at what happened since Feb. 19 of this year, and why it might just provide a map of what’s possible going forward.
On that day, the S&P 500 Index closed at an all-time high. And as the market is generally a forward-looking instrument, this record represented a belief that the economy was going to continue its relatively steady growth rate. Yes, this is an oversimplification, but stay with me. At about that same time in February, the world started to realize how serious the pandemic could get, and the markets fell into bear market territory, as the world economy was shut off like a light switch. The S&P 500 fell more than 30% from its Feb. 19 high, and finally bottomed-out (for now) on March 23.
Let’s pause for a moment to trudge through our global reality on March 23. The market had crashed, the economy was effectively shut down, tens of millions of people found themselves out of work, and each day felt like a week. Did I mention the budding pandemic?
On or around March 23, our economy, our nest eggs and our health seemed as though they were all at serious risk. Frankly, and I’m speaking for myself here, I’m only confident one of those elements is out of the danger zone today. Why? Because what normally takes over four years to fix was fixed in 148 days. On average, a bear market recovers to pre-fall levels in roughly 4.2 years. This time around, we recovered in 148 days.
Let’s guess as to why.
First, the Federal Reserve has once again taken to Quantitative Easing. Essentially, the Federal Reserve purchases trillions of dollars of bonds so banks will use the cash proceeds to lend money to businesses. Investors generally view this capital exchange as a sign that higher revenue and profit are on the horizon, so they continue to invest in those companies via the stock market. In turn, this drives stock prices higher. Again, this is an oversimplification, but I only get 750 words.
Second, the Fed has stated it will do “whatever it takes for as long as necessary” to support our economy. This seems like one-part vague promise and one-part subtle threat, depending on your view of Keynesian and Austrian economics. Even if this upsets you, the Keynesians run the world, or at least the Fed, and I’m willing to believe recoveries from sudden market events will continue to happen at a breakneck pace.
My point is, whether or not a constitutional crisis–and all the economic and market chaos it would bring–is nigh, it’s impossible to time our exit and re-entry into the markets, especially when a four-year process was recently reduced to a 148 day ultra-recovery. I didn’t even have enough time to lose the weight the early pandemic slapped onto my Midwestern frame before the market had recovered.
If I’ve said it once, I’ve said it a thousand times: You might know when to get out of a scary market, but you don’t know when to get back in. And that’s the fundamental problem with timing the market.
If you haven’t already, talk to your financial adviser about her long-term market outlook. The reality is, your adviser’s long-term outlook takes into account her short-term outlook. Her short-term outlook, in isolation, should likely be reserved for masked cocktail parties and to keep things spooky, since there won’t be many trick-or-treaters to terrify her sensibilities. Professionals very rarely stoke action based on a short-term outlook, even in the face of a potential constitutional crisis.•
Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to email@example.com.