Usually, the stock market drops following scary headlines that were meant to stress us out and keep us watching or scrolling. Our job is to try and calm everyone by remembering the stock market is a reflection of emotional individuals who, at times, stop thinking rationally and panic.
2020 was very different. It was the year of the Great Disconnect. The stock market, after an initial swoon, became quite calm and measured while the news and social media became panicked and emotional.
How can “Wall Street” climb when the news is reporting chaos on “Main Street?”
Without attempting to draw any political or moral conclusions, here are three reasons we believe this to be the case:
- The outrageous actions of the few protestors and rioters in Portland and D.C., among other cities, do not represent the views of the majority of us. Most of us were betting on a peaceful transfer of power. The news had us on the edge of our seats.
- The daily bad news about COVID has been offset by the long-term hope of vaccines and herd immunity. The stock market discounts what’s happening today and pays closer attention to what’s likely to happen six months from now.
- We think the main reason is this: the pandemic resulted in rare bipartisan support for stimulus to prop up the economy. This has boosted savings in the US dramatically. Bank of America says only 28% of the latest $600 stimulus checks have been spent so far. High amounts of savings bodes well for stocks because savings typically find a way into investments of all kinds.
This is certainly not an exhaustive list, but meant to help us tone down the media drama we get bombarded with on a daily basis.
In this day and age of “outrage” culture, there are plenty of issues to react to. Social, political, financial… you name it. We suggest bucking the trend and vowing to be ‘unraged.‘ This would certainly benefit our country in the social and political areas, but that’s not our area of expertise. Financial advice is what we get paid to give.
In our experience, the ‘unraged’ investors have been the most successful. That’s someone who doesn’t get emotional at bad news but looks for opportunities to invest in good companies, funds, and real estate at below market value levels. It’s also helpful not to be emotional at all-time highs either. Getting too excited and putting too much hope in your account balance can either cause you to sell out completely and miss out on future gains or cause you grief when the next inevitable pullback shows up. Don’t put your hope in the stock market, find something with less volatility to hope in.
Financial planning can also help us be ‘unraged’ investors. When you’ve thought through and planned for a litany of possibilities, even death and disability, you have a better chance of staying calm and making wise decisions regardless of what the future might hold.
We can now see what the political future holds for us, at least for the next few years: a Democrat-controlled White House, House of Representatives, and a razor-thin majority in the Senate.
This is how Wealth Advisor described the Democratic Senate majority:
The positive outline here is simple — a slim Democratic majority is enough of an advantage to pass additional fiscal support but not large enough to pass more ambitious legislation like raising taxes or a Green New Deal. Some investors on Wednesday called this a “fiscal goldilocks” scenario.
Long-term, the market will look past COVID-related disruptions as long as Congress continues to send checks to Main Street. When these dry up, and the economy has to stand on its own two feet again, we may have another opportunity to practice being ‘unraged’ investors.
We are thrilled with last year’s performance. The Growth Stock Portfolio handily beat the stock market in part because it WASN’T invested in much oil, travel, or banking related companies. Some of the high performers were Zoom, Mercadolibre, Nvidia, and Target. We’re currently sending out Reports of Performance to existing clients so everyone can see their specific return.
The more modestly aggressive Fund Portfolios were also positive but only saw single-digit returns because of the more conservative nature and more broadly diversified approach. We made some changes in this portfolio at the end of 2020 by selling some of the underperforming funds. We are moving a portion of that portfolio to see better growth going forward. The Motley Fool Company, a company providing investment research, has a few funds that were adding to the portfolio.
We know moods will change and the market will go down again someday. Just in the last few days we’re seeing some cracks in this unstoppable market.
Fortunately, client accounts are more conservative than they usually are as we wait to see things play out. As you might expect, the resolution to COVID is first on our list to watch, but there are other anomalies we’re seeing in retail investing, specifically the trading of Gamestop GME, that we’re following as well. We plan to invest some of the extra money sitting on the sidelines when we see the next financial surprise hit the news and push the stock market down.
Please let us know if there’s anything we can do for you!
Bruce & Tim Porter