Imagine that Rip Van Winkle was an investor who fell asleep in January and just woke up.
He’d be ready for a big yawn. And he’d think stocks had given him good reasons for one.
After all, the Dow and S&P 500 are only showing modest single-digit gains for the year, putting them on course for their average annual return of about 10%.
But for investors who’ve been wide awake, 2020 has been anything but ho-hum.
The year got off to a good start with fresh all-time highs in January. But the pandemic and economic shutdown put a quick end to that.
From February to March, we experienced the quickest bear market in history. That was immediately followed by the fastest bull market in history.
From the March 23 low, the S&P 500 rallied an astonishing 61%.
However, the last seven weeks have been a period of consolidation, with short rallies followed by mini sell-offs.
Stocks have sputtered… but why? A better question might be “Why not?”
For months, we flattened the curve of coronavirus infections.
Deaths and hospitalizations were down. Consumer and business confidence was up. So were airline and hotel bookings.
Three drug companies planned to have safe and effective vaccines available before the end of the year.
As far back as August, it looked like the next stimulus package from Uncle Sam was a done deal.
But over the last few weeks, just about everything fell apart.
With the advent of cooler weather – and the relaxation of social distancing measures – the virus bounced back with a vengeance, here and abroad.
Both Johnson & Johnson (NYSE: JNJ) and AstraZeneca (Nasdaq: AZN) halted their vaccine trials to assess the ill health of some participants.
Hospitalizations went up again. Airline bookings came down.
And that done-deal stimulus package? It has become a political football. We still don’t have it.
To top it off, we’re on the eve of contentious national elections whose results may not be clear for weeks.
In short, the stock market has had plenty to digest lately. As a result, it stalled.
With so many negatives, what should you do as an investor?
Some will argue I’m suggesting that you turn a blind eye to risk or – worse – bury your head in the sand.
Not at all. I’m only suggesting that you recognize the short-term nature of these problems.
Yes, confirmed cases of COVID-19 are up. But as the economy reopened – and pandemic fatigue increased – this was always a certainty.
While confirmed cases have spiked, we are getting better at treating the disease. The death rate is still down considerably from earlier this year.
(More than 99% of Americans age 70 and under who contract the coronavirus don’t die from it.)
True, some vaccine trials were halted. But they’ve already restarted.
A vaccine is still on its way. And as people get vaccinated, the economy – and life – will return to normal.
As for the stimulus package, the two sides aren’t that far apart. We will almost certainly have one once the election is out of the way.
Let’s turn to the economic backdrop.
We have low inflation. Zero interest rates. Cheap energy. Rising employment. And better-than-expected corporate earnings.
Yes, some consumers are struggling, but most are in good shape.
Household net worth is rising. U.S. credit scores just hit their highest level in history. And sales of homes, cars and durable goods are up sharply.
Consumers don’t buy big-ticket items like these if they are pessimistic about their financial future.
Even bond yields have backed up in recent weeks, confirming that better economic times are likely ahead.
In short, the problems facing us – the pandemic, the stimulus, the election – are near-term and will soon be behind us.
The positive economic fundamentals are longer term… and setting us up for prodigious economic growth in 2021 and beyond.
Of course, the election results will have a huge impact on employment, taxes, regulations and the economy – for better or worse.
I’ll cover these important factors in Monday’s column, the day before the election.
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