Faith and Doubt in Equal Measure
There are media reports daily on the workings of the stock market, and why it’s gone up or down. One day it is up due to “optimism about economic re-opening” and the next day it is down due to “renewed concern about the growth in coronavirus cases.” For many of us, our own state of mind has been experiencing similar ups and downs and reversals – distress at tragedies, balanced with hope and encouragement at the public discussion of coherent policy response. Up or down, an undercurrent of uncertainty runs through the markets and current life; yet, we need to make decisions, and we need to be able to move forward.
We Choose Optimism
We believe in positive long term outcomes in the economy and the markets, in order that our clients can be engaged with the economy not only in their lives and livelihoods, but with their capital. Their accumulated savings must be stewarded until they need it, and through investing the savings can circulate and grow. Volatility along the way is a reality, but is less problematic when the day they will need to spend their savings is still comfortably far away.
We take stock of our clients’ worries and hopes, even as they may yo-yo from month to month. When uncertainty spreads and there are abundant downside risks, we revisit their tolerance for volatility. History has shown that downward moves in stock prices can come swiftly and without warning, usually in response to current concerns and emergent threats to longer term value. That said, history has also shown that staying invested amidst these concerns and managing the balance of opportunity and protection has supported more significant growth.
We Choose Caution
In reviewing the market landscape on a day by day and week by week basis, we have skepticism to keep us warm. Even with faith in the market longer term, the recent cutoff of economic activity has had a negative price impact. The broad US stock market is still down about -5% and international markets about -12% since their highs earlier in the year. In our business, this is referred to as “a haircut.” Widespread recognition that there will be at least a short-term set back in business valuation re-sets prices to what is agreed to be a more appropriate level. Finding “appropriate” within the clouds of uncertainty is more an art than a science, and actual movement of prices at times feels like a Jackson Pollack painting: evoking of emotion, but hard to make rational sense of.
Analysts currently expect a collapse in corporate earnings in the second quarter, estimating an average decline of -45% in comparison with earnings in the second quarter of 2019. The recovery in the markets over the last few months indicate that investors have found a way to look beyond short term problems, but this is not because they know precisely how longer term recovery will happen. Instead, it is a disproportionate focus on long term opportunities, exactly the opposite of the disproportionate focus on short term problems back in March when the market was plummeting.
We Choose Engagement
Our faith in long-term growth is based on managing the right balance of investing in innovation and retaining stable reserves. In daily home finance, we observe the same need for caution and skepticism in the short term, combined with the ability to map a path to positive outcomes over the longer term. We buy insurance in the short term, to forestall interruption of our future security. We keep some cash reserves to help when short term demands are greater than expected. We hedge our expectations and develop back up plans. This is true in investing, and it is true when we are handling issues closer to home. We have faith in the eventual outcome, and we work with the uncertainty and the doubt along the way.
Investors always face uncertainty, and currently the way forward on social, environmental and health policy is unclear as well. Affirming that you are rooted in a balance of long term faith and short term caretaking is a first step. That puts you in a better position to strongly move forward with opportunities when they arise, to welcome the moments and decision points that allow deliberate, positive action.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.