2nd Quarter 2020

The global economy is forecast to contract 5% in 2020; yet, paradoxically, a number of investors are worried about inflation since the Federal Reserve and other central banks began flooding the markets with stimulus. At the same time fiscal expenditures have soared to help alleviate the effects of the coronavirus pandemic, while tax revenues have plunged.

In May of this year, the U.S. deficit widened to $424 billion, double what it was in May 2019. The Congressional Budget Office (CBO) estimated that the federal deficit for the first eight months of the fiscal year, which began in October 2019, totaled $1.9 trillion – that’s 157% higher than the same period last year. The CBO estimated the 2020 deficit could reach nearly $3.7 trillion, easily surpassing the previous peak during the last downturn. The deficit, as a percent of GDP, is projected for the year at 18%, the highest level since the last recession.

Even modest inflation can have a deleterious effect on retirees’ savings and fixed income. A 3% inflation rate over 10 years will reduce purchasing power by approximately a third.   

In addition to expansive fiscal policy, the Federal Reserve is injecting substantial liquidity into the economy by purchasing bonds. By the end of the year, the Fed is projected to purchase $3.5 trillion in government securities. The Fed’s goal is to provide liquidity to credit markets in times of market stress and to support a market recovery. In the past, large scale government spending and an expansion in the money supply have often led to bouts of inflation that were difficult to tame. 

3rd Quarter 2018

September 2018 marked the 10^th anniversary of the Lehman Brothers collapse, one of the defining moments of the financial crisis or the Great Recession. In addition to the Lehman bankruptcy, Fannie Mae and Freddie Mac were placed under federal conservatorship, and several other government-orchestrated bank tie-ups and bailouts occurred in a chaotic September 2008. For the full year 2008, the S&P 500 declined by 37%. It was an historic, turbulent and nerve-rattling period for investors. 

Paramount to long-term investment success is the ability to wed a prudent, well-designed investment plan with a disciplined and proven process to carrying out those investments.

What a difference a decade can make. We are in the 10^th year of one of the greatest bull markets in U.S. history. During September 2018, the S&P 500 set a new all-time high. According to Wilshire Associates, U.S. equity values have increased 337% (as of this writing) since the stock market’s low in March 2009. Today we are experiencing the opposite of where we stood 10 years ago. The focus now should be on where we go from here and how best to guard against emotional triggers, overconfidence and complacency that can lead to both poor decisions and results.

Market cycles, or the ups and downs of the stock market, can be hard to navigate and even harder to predict. Even in the midst of a great bull market, successfully managing through the constantly shifting financial markets is a challenge for investors due to the inability to accurately time market changes as well as our emotions that often overtake reason. This challenge is greater in periods of turbulence and market declines. We know from history that market cycles are an inevitability, but timing the beginning and end of these cycles has proven to be an unsuccessful endeavor for individuals and professionals alike. Investors must guard against biases and emotions that can cause us to make impulsive investment decisions that may derail our long-term goals.   

The current bull market celebrated its eighth anniversary on March 9, 2017. Since it began in the aftermath of the “Great Recession,” the Standard & Poor’s 500 benchmark index has gained 249%. While there are some pundits who point to evidences of a bubble, particularly after the post-election rally, other signs point to a global economy that’s been picking up steam fueled by promises of corporate tax cuts and a fiscal spending boost.

How does this bull market compare to those of the past? As bull markets go, this one is neither the best performer nor the longest. The dot-com bull market of 1990 to 2000 is the longest on record and is also the best-performing with a 417% gain. In the area of valuation, the current bull market comes in second to the dot-com bubble, though it’s getting close. The S&P 500 was trading at a multiple of 30 times earnings when the dot-com bubble popped in 2000.

Long-term investing, however, puts the spotlight on what really matters – the growth of economic value and competitive advantages of a business.