In February 2020, the stock market began a shocking slide that caused many investors to sell out and move cash to the sidelines. Now, six months later, the major indexes have rebounded and, in some cases, even exceeded their prepanic levels. For those still waiting to reinvest, the question is: “What do I do with cash now?”
The onset of the pandemic earlier this year was a scary time and the cause of a market price collapse. Not only were we concerned about our money, we were worried about our health and safety. The ensuing and dramatic decline, which quickly reached a low on March 23, 2020, was overlooked by few investors and observers.
Since March, values have risen, yet the pandemic rages on. New infections in the United States are still at very high levels. Certainly, the anticipation of vaccines or treatments are affecting investment decisions and thus the markets, but this doesn’t quite answer the questions many are asking: “Why has the market gone up so much?” and “What should I do now?”
Interest rates are at all-time lows. As of August 20, 10-year US Treasury notes were yielding less than 1 percent! Money market funds and savings accounts pay close to zero. Stocks seem to be high, and many ask whether it’s now better to move cash from the sideline back into the markets.
First, consider that the broad market may not have fully recovered and that there may be some sectors of the market that are very expensive and others that are available at multiyear bargain levels. At the moment, the best-known and widely followed indexes are being carried by a handful of very large, very strong stocks selling at extremely high valuations generally seen only during periods of incredible excess (such as 1973 and 1999).
So-called growth stocks, companies that are characterized by steady increases in annual earnings, high cash flow, and clean financial statements, have been in the limelight since the last recession’s market bottom in March 2009. Many of these stocks snapped back quickly, all the way to recent highs, and sell at high multiples of their earnings. Some stock market leaders are trading at levels up to 100 times their annual earnings!
A study of historical stock market returns will show that growth stocks are typically underperformers over long periods of time. We could segue into a very good discussion about why this is true, but in the interest of saving time and making this short post readable, let’s just say that this is so because over time there is less financial risk in companies that continually increase their earnings and cash flow.
What, then, outperforms over decades?
Value stocks are companies that tend to rise and fall in market value with the ebb and flow of the economy and financial trends. These companies tend to have “lumpy” earnings and don’t necessarily enjoy annual, steady increases in earnings like many growth stocks. Because they are often tied to the fortunes of the general economy or an industry, they can lag for many years. Such is currently the case for value-style stocks, both large and small, US and international. Yet the historical evidence is that these asset classes have outperformed over long, meaningful periods of time.
If you are a diversified asset class investor, the odds are good that you have a component of large and small value stock mutual funds in your portfolio. If not, ask your adviser about your asset mix or look into the long-term prospects for this slice of the market.
Before you put new money to work in stocks, make sure that your prospective investment is in harmony with your overall life and lifestyle plans, your time frame, and your risk tolerance.
Check out my next post on "Design, Build, and Protect" before you make any long-term decisions.
The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth. This article is for general information only and is not intended to serve as specific financial, accounting, or tax advice. IRN-20-952