Google Docs, Echo, Charms, Cut-Time; these are a few of the new tools we are incorporating in our daily lives after our first week of school. Among many other titles, my wife is now the Chief Technology Officer in our house! We were nervous about how this past week was going to go and we found out our kids are a lot more resilient than we gave them credit for. In some ways, our first week resembles where we are in the market.
The Presidential election dominates the headlines and will continue to do so until November. Yet, the uncertainty it brings foreshadows the economic fundamentals. While we do expect volatility to pick up in the weeks to come, the underlying improvements in the economy over these last few months will drive long-term growth.
A medical breakthrough is the main positive catalyst for the markets and the economy. Further monetary stimulus and increased fiscal policies are also providing a positive backdrop for equities and credit as the employment picture continues to heal. On the other hand, COVID-19 setbacks and faltering consumer sentiment would dent the confidence built into today’s stock prices.
Stocks, bonds and cash each have some upside and some downside potential. A pick-up in short-term volatility will support cash and bonds, but stocks best capture long-term economic growth. A portfolio of stocks, bonds and cash also has some upside and some downside attributes but is ultimately built to withstand uncertainty over the long-term and provide a risk-adjusted return to meet your financial goals.
As Mike Tyson famously said: “Everyone has a plan ’til they get punched in the mouth”. We can build the most diversified portfolio, but at the end of the day, none of that matters if investors are not resilient as well. Certainly, the market has had a historic recovery since March, and we all feel better now that the S&P 500 index is back near new all-time highs. We did get punched in the mouth in February and March, and in some ways, each one of us found the level of volatility we can tolerate.
Behavior around risk aversion and other biases can lead investors to make mistakes at the most unfortunate time. A risk-averse investor will choose to put their money into a bank account with a low but guaranteed return, rather than into a stock that may have high expected returns, but also involves a higher chance of losing value.
Emotions are high right now, but emotions are an investor’s worst enemy. Resiliency, disciplined and rational decisions are the foundation of successful investors. We are not trying to time the market. We do however constantly discuss and assess the risks and opportunities of each investment decision we make. What will you do if you get punched in the mouth again?
If you have any questions or want to have a conversation about the market or your portfolio, please contact Liz, Ed, Fred, Scott, Tyler or myself. Your Sendero team is ready to help.
Amaury de Barros Conti