{"id":7823,"date":"2020-07-07T14:19:57","date_gmt":"2020-07-07T18:19:57","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=7823"},"modified":"2022-02-27T17:54:33","modified_gmt":"2022-02-27T17:54:33","slug":"4-lessons-last-six-months","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/4-lessons-last-six-months\/","title":{"rendered":"4 Lessons from the Last Six Months"},"content":{"rendered":"

When 2020 started, two of my biggest event-driven, macro concerns were rising geopolitical tensions with Iran and the potential for a messy run-up to the presidential election.<\/p>\n

Then the pandemic happened.<\/p>\n

The ground underneath the global economy shifted astronomically, quickly, and in ways few could have anticipated. Within 30 days, the stock market had declined -30% and the economy was in a deep recession. But then, with the economic crisis seemingly just getting started, the stock market baffled many investors with its strong and \u201cv-shaped\u201d rebound \u2013 even as a thick blanket of uncertainty still hangs over the economy.<\/p>\n

Needless to say, it\u2019s been one of the most interesting starts to a year in my career. Now that we\u2019re halfway through it, I think it\u2019s a good opportunity to zoom out and take stock of what happened and parse the experience for lessons and insights. Here are four of mine:<\/p>\n

    \n
  1. Risk Happens Fast, But Markets Move Faster<\/strong><\/li>\n<\/ol>\n

    When the stock market peaked on February 19th, the economy wasn\u2019t yet in a steep economic recession \u2013 but it was about to be. By the time the federal and state governments had started asking Americans to limit travel, socially distance, and stay home if possible (around mid-March), the S&P 500 was already down around -30% and close to hitting a bottom.1<\/sup> Risk happens fast, but markets move faster.<\/p>\n

    The lesson for investors here, in my view, is a stark reminder that while most people assess and understand risk in real-time \u2013 based on watching the news or reading the newspaper \u2013 the stock market anticipates <\/em>risks before they become widely known. By the time most investors realize it\u2019s a recession and an economic crisis, it\u2019s too late.<\/p>\n

      \n
    1. Event-Driven Bears are Scary but Lack Stamina<\/strong><\/li>\n<\/ol>\n

      Bear markets generally fall into one of three categories:<\/p>\n

        \n
      • Structural\u00a0<\/em>bear markets are triggered by structural imbalances and financial bubbles, often resulting in price shocks and deflation.<\/li>\n
      • Cyclical\u00a0<\/em>bear markets are part of a normal business cycle and typically commence during periods of high inflation and rising interest rates.<\/li>\n
      • Event-driven\u00a0<\/em>bear markets can be triggered by policy mistakes or any sudden shock. They typically lead to a sharp market decline but not a long recession.<\/li>\n<\/ul>\n

        So far, this episode has followed the patterns of an \u2018event-driven\u2019 bear market\u2014steep, but shorter and less severe than structural and cyclical bear markets. I do believe it\u2019s possible that this event-driven bear could evolve into a structural bear if the outbreak materially worsens and stimulus ends, but the jury is still out on both.<\/p>\n

        \"\"<\/p>\n

        Source: Goldman Sachs3<\/sup><\/em><\/p>\n

          \n
        1. Initial Jobless Claims are a Key Indicator for Recessions and Bears<\/strong><\/li>\n<\/ol>\n

          The two charts below look at initial jobless claims, which is defined as a claim filed by an unemployed individual after leaving an employer. The top chart shows the last year, and the bottom chart looks at a period during and after the Great Recession: January 1, 2008 to December 21, 2009. The fascinating takeaway from both data sets is that the stock market bottoms at almost exactly the time when initial jobless claims reach a peak. <\/em>This, in my view, is no coincidence \u2013 the stock market is picking up the signal that the worst of the economic crisis is over, even though it will take the job market years to fully recover.<\/p>\n

          Investors often have a hard time with this reality. How can the stock market go up when hundreds of thousands \u2013 or even millions \u2013 of Americans are still losing their jobs? The answer is that the stock market is already looking ahead by six, twelve, even two years into the future. Just like the stock market plummeted well before anyone grasped the full damage to the job market, so too does the stock market soar well in advance of the job market recovering. \u00a0<\/em><\/p>\n

          Initial Jobless Claims, June 2019 \u2013 June 2020<\/strong><\/p>\n

          \u00a0\"\"<\/strong><\/p>\n

          Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/p>\n

          Initial Jobless Claims, January 2008 \u2013 December 2009<\/strong><\/p>\n

          \u00a0\"\"
          \n<\/strong><\/p>\n

          Source: Federal Reserve Bank of St. Louis5<\/sup><\/em><\/p>\n

           <\/p>\n

            \n
          1. Technology is King, but so is Diversification<\/strong><\/li>\n<\/ol>\n

            The pandemic made even more apparent a trend that was already well underway: rapid expansion of the digital economy. Businesses and sectors that had been slow to adopt technological upgrades, enterprise software, cloud-based systems, and remote work are all scrambling to catch up. Technology helped soften the damage to the economy and the stock market, and are helping lead the recovery.<\/p>\n

            I\u2019ve noticed many investors looking to tilt more heavily to technology as a result \u2013 I\u2019d urge caution. Exposure to the Technology sector is a crucial component of any diversified equity strategy, there is no doubt about that. But now is a time to remember the merits of diversification as part of a long-term strategy. In my view, pivoting heavily to technology right now puts investors at risk of making two classic investment errors at once: chasing heat, and shifting asset allocation when your long-term goals haven\u2019t changed.<\/p>\n

            Bottom Line for Investors<\/strong><\/p>\n

            Above all, perhaps the most important lesson we can take away from the first six months of 2020 is a lesson we\u2019ve known all along: don\u2019t try to time the stock market. <\/em>Risk happens fast, but the markets move faster. When investors try to react in a time of heightened emotion, volatility, uncertainty, and a stream of negative news, it leaves the door wide open to making critical mistakes. Diversification and a long-term focus are still king, but so is patience.<\/p>\n","protected":false},"excerpt":{"rendered":"

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