Dear Legacy Wealth Alliance Family,
I hope this letter finds you well as another month of this bizarre year comes to an end. While I cannot speak for anyone else, personally through all the uncertainty and change the first seven months of this year has brought, I have felt extremely grateful that my family and I have been able to maintain our health through this unprecedented time. Some of you may know that my partner and best friend, Emma, works in the Neuro ICU at Banner Health in Phoenix. With Banner opening its fourth COVID designated floor, Emma, and many of her colleagues, have been on the front lines of this pandemic since mid-March. I have seen firsthand how this has affected her and brought much stress and uncertainty to our household. I am sure this stress many of you can relate to. Whether it is from a child uncertain about the upcoming schoolyear, a parent isolated in a nursing home facility, the loss of a job due to economic shutdowns, or a family member who faces similar risks at their job as Emma, I hope we all can take a small moment out of each day to appreciate that we are in this together and to remind ourselves to let the ones that we love KNOW IT.
Much like this pandemic, the capital markets are not in our control. This feeling of the unknown can cause fear in any of us. Fear is one of the strongest feelings a human can experience and although it can prepare us to run or fight, it does not prepare us to make sound financial decisions. Each day the financial media attempts to grab our attention and therefore clicks by tugging on this emotion. That is their job. Our job is to help you tune out the noise and quell some of those financial fears you have undoubtedly experienced this year. To help us all overcome these fears, please consider the following tips:
- Learn from it – Find out what triggers your fears, learn the lessons from it, make appropriate adjustments, and then move on.
- Face it – Face your fears gradually building up a tolerance with each occurrence. If we avoid them, our fears will grow over time.
- Fake it – The adage is we smile because we are happy. Scientists now believe we can become happy by smiling. Now is the perfect time to fake it no matter how difficult it may be.
- Make it meaningful – Determine what causes fear and turn this into an opportunity for service to make it more palatable. Support a local restaurant, buy groceries for a neighbor, or write a letter to the medical professionals on the front lines; all of which will have the effect of turning fear on its head.
Switching back to the capital markets, this year has really been a tail of two quarters. To shed light on what occurred through the first seven months of 2020, we broke down returns by each quarter using the Russell 1000 Index to measure the US Large Cap sector and the US Small Cap sector measured by the Russell 2000 Index. Both indexes were down -20.2% and -30.6% respectively through Q1 of 2020(1). This as you all know by now, in large part was due to fears and uncertainty surrounding COVID-19 closures and its impact on the economy. Even though Q2 2020 saw record numbers of first-time unemployment claims, the market reacted positively with the same US Large Cap and US Small Cap Indexes posting returns of +21.8% and +25.4% for the quarter(1). In fact, many equity sectors returns through Q2 were just below break-even on the year. As of the date this commentary was written on July 27, at market close, the Russell 1000 is +0.8% and the Russell 2000 is -11.0% for the year(2). Market analysts and economists have pointed primarily to the Federal Reserve and Government’s quick response helping to mitigate the economic impact of COVID closures for the reason many equity sectors rebounded almost as quickly as they declined. Through the first seven months of the year one thing is certain, market volatility has severely whipsawed investors. The sharp drop in Q1 followed by the rebound in Q2 highlights the difficulty of timing the market and investors who stuck to the plan and ignored the fear of uncertainty by not making changes to their portfolios have recovered most of the temporary losses from the beginning of the year.
A second feat realized thus far in 2020 is evident in another major US index we track, the S&P 500. This index follows the largest 500 public companies in the US economy and has seen the weight of its top five companies – Microsoft, Apple, Amazon, Alphabet and Facebook – surpass 20% of the total index for the first time ever(1). Those firms now represent more than one-fifth of the total index’s value even though they make up one-one hundredth of the companies the index tracks. This highlights the outperformance large cap technology stocks have realized over Q1 & Q2 compared to their counterparts. This index weight disparity is another reason that US Large Cap markets have been able climb back as economic data is telling us a different story. Even with the markets nearing February’s all-time highs, we still see value in many depreciated sectors such as Industrials, Financials and Energy who through June 30 are all down between -14.6% & -35.3% from the start of the year(1). This wide range of results between the best and worst performers is a prime example of why diversification helps investors weather these market corrections. For many of you that undergo periodic rebalancing, you were able to realize these gains by selling out of the overperforming sectors, selling high, and redeploying those funds into underperforming sectors, buying low.
Looking beyond what has already occurred year-to-date in the capital markets no one knows for certain what the rest of the year has in store. Markets have rallied on hopes of a recovery as lockdowns are eased and hopes of a vaccine become clearer. We do know the US has seen record levels of fiscal stimulus, sustained low interest rates committed to by the Federal Reserve and ongoing low inflation that all create a supportive environment for equities outperformance over the medium-term. With that being said we expect to see more short-term volatility leading up to the election and through the end of the year which could result from any number of reasons – a second virus wave, the US stimulus package exhausted, US/China relations and election uncertainty. Because of this now is a great time for long-term investors to invest into a diversified allocation. We are recommending that clients and individuals with funds they are looking to invest Dollar Cost Average their contributions over a six-month period helping to capture future expected volatility.
Please remember if you, a friend, or a family member have any questions or would like to review how your current portfolio allocation is positioned for the long-term, please do not hesitate to reach out to our office. We want to thank all our current clients for your continued faith in us and wish you all a happy and healthy August.
Jon Launder, CFP®
(1) Russell Investments Economic and Market Review
This information does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may view this information. Statements, opinions and forecasts made represent a particular observation and assessment of the market environment at a specific point in time and are not intended to be a forecast of future events or a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended. Statements regarding future prospects
may not be realized and may differ materially from actual events or results. Past performance is not indicative of future performance.
Diversification cannot eliminate the risk of investment losses. Dollar-cost averaging does not assure a profit and does not protect against loss in a declining market. Using this investment method involves continuous investment in securities, regardless of fluctuating price levels. Therefore, you should consider your financial ability to continue purchasing through periods of varying price levels.