No matter what type of investor you are, there are some very basic “truths” that drive investment activity. One such truth is that you cannot predict the direction of the market with any certainty. As some say, “stuff happens.” That truth translates into my worldview: To be successful as an investor, you need to embrace uncertainty.
It goes without saying that the challenge of uncertainty is heightened during a pandemic market such as the one we are experiencing.
At the beginning of the year, the S&P 500 index peaked on Feb. 19, at an all-time high of 3386.15. That was quickly followed by a rapid correction, which reached a bottom on March 23, as the market reacted to the unprecedented global shutdown due to the COVID-19 pandemic. Since then, the S&P 500 has recovered due to global liquidity, an expanding Federal Reserve balance sheet and interest rates near zero.
Who could have predicted the pandemic? Who could have predicted the quick market recovery? Who liquidated holdings for fear of the pandemic? Why? Who stayed the course? Why?
During this short time frame, performance by style and size ranged dramatically. The S&P 500, which is weighted by market capitalization and driven by the five largest stocks by capitalization, was down 33.8% from peak to trough, and up 47.2% from the trough to July 31.
Take out the effect of market capitalization and you have a very different story. An equal-weighted (not market-cap-weighted) S&P 500 index (the S&P 500 Equal Weight index) was down 39% from Jan. 1 through March 23, and up 49.4% from the low of March 23 to July 31.
Despite the healthy rebound, the S&P 500 Equal Weight index trailed the S&P 500 index by 880 basis points through July 31 (the S&P 500 index returned 2.4%, and the S&P 500 Equal Weight index lost 6.4%).
Another way to look at performance is to isolate the top five market-cap-weighted stocks: Facebook, Apple, Amazon, Microsoft and Alphabet (Google). These five names account for a large 23% weighting in the S&P 500 index and returned over 37.9% collectively from Jan. 1 to July 31. The remaining stocks represented in the S&P 500 index lost 6.2% collectively from Jan. 1 to July 31.
Income-generating stock funds, which are typically slower-growing and less volatile than the market, fell more than the S&P 500 Market Cap Weighted index from peak to trough.
The Morningstar Dividend Leaders index lost 39.5% compared with the decline of 33.8% for the S&P 500 index. Although the Morningstar Dividend Leaders index rebounded 42.5% from trough to July 31, it has not kept pace with the large-cap-growth names (up 47.2%), which have small to no dividend yields. The Morningstar Dividend Leaders index is made up of 100 high-yielding stocks, selected for dividend consistency and sustainability.
Through July, we have seen companies beating lowered expectations, unemployment trends improving from historical lows, and significant progress in getting coronavirus vaccine candidates to phase 3 trials. The upcoming presidential election and negotiations on further fiscal stimulus will be risks on the near-term horizon. Overall, although equities have higher volatility than bonds, they also have a better opportunity to outpace inflation.
The next unknown will be the election. We’ll talk about that in a future column.
No matter the type of investor you are, it’s a good idea to address uncertainty and how you will handle market disruptions such as we’ve seen so far in 2020.
For a quick video that covers the topics we’ve discussed in today’s column, go to vimeo.com/447938137.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org). Please visit www.juliejason.com.
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