Taking In The View

Friday Reflection | October 23, 2020

Taking In The View

“Life is what happens to you when you are busy making other plans.”
– Allen Saunders

John Lennon made Saunders’ phrase famous in his song “Beautiful Boy”, in which he sings to his son Sean about the bittersweet nature of life and growing up, in which you can only patiently live in the present, even while you are excited for your life beyond that. In life, as in the stock market, this conundrum is omnipresent. The pandemic has us standing still in many ways, waiting for the future to arrive. Simultaneously, responding to the pandemic is launching us towards the future, bypassing the process of incremental change in healthcare, technology, and work habits to plant us miles down the road from where we were pre-pandemic.

This week the market continued to meander sideways, waiting patiently for the expected reward of another round of Federal stimulus. While corporate earnings have shown certain companies leaping forward, the reality of fantastically optimistic stock pricing remains. Tesla is a prominent example, declaring with a small profit rather than a loss. Nonetheless, the stock trades at 792x its trailing twelve-month earnings, compared to the current average tech stock’s price/earnings ratio of 38x, and the long-term broad market average of just under 16x.¹

Another timely stock leaping into the future even as it remains rooted in the present is Proctor & Gamble. Usually, a staid performer, in the midst of pandemic-supported revenue increases the company beat earnings estimates in both of the last two recent quarters. The stock now trades at 27x, a lofty valuation that assumes additional earnings gains in the coming years. Its stock is up 16.8% this year – more than twice the broad S&P index, and far outpacing the 95% of companies in the index whose stocks in negative price territory year-to-date.

In the long view, reversion to the mean has been a constant tenet of market pricing. Short term variation is usually reversed at some point, averaging out to create consistent longer-term results. Statistically, long term growth in the economy has led to stock prices that go up two days out of three, and a broad market that has positive performance two years out of three. That doesn’t mean that there won’t be a material transformation in the fortunes of certain investments, consumer products, or business trends. Last week, we wrote about online shopping darling Etsy as a harbinger of a trend away from consolidation in retail that was pushed to grow by the pandemic and has emerged as the top performer in the S&P 500 in 2020. Similarly, changing people’s habits around visiting the doctor, moving from in-office consultation to phone or video appointments, has received a boost by necessity during the pandemic.

In our personal financial lives, taking the long view can also help us act effectively in the present. Many of our clients report feeling reluctant about making decisions, unsure of the wisdom of major changes right now. Being decisive in an uncertain environment can indeed feel incongruent. If you don’t know whether or not to hand out Halloween candy, how can you begin to think about when you’d like to retire?

And yet, the focus on the present can be oppressive. The pandemic’s impact is exhausting, and the novelty of doing jigsaw puzzles and cooking more has worn off. Political rhetoric has been at a high pitch for months, and nerves are frazzled on all sides as the November election looms. Racial justice and related social issues are a part of that conversation, but are also in the news for their persistence over decades and centuries, making clear that the election may not resolve all issues.

In the short view, the election is creating a strong sense of instability. Clients contact us to determine if there is something to be done to protect their portfolio at this moment, to take shelter from the instability via concrete action. While there is often some volatility in stock prices in the immediate days and weeks following an election, they are not pivotal for longer-term market valuations.

In the 90 years leading up to 2020, one party controlled both chambers of Congress and the presidency about half the time. The other half of the time, there was a split government. In all the possible configurations, whether the election brought a Democrat or a Republican into the White House, the market didn’t usually move much. And for those concerned about market performance, again, the long term averages indicate virtually no difference – rising 2/3 of the time and falling 1/3 of the time, with an average long term return between 7.25% and 7.45%.²

The connection between stock prices and current corporate profitability is indirect, leading to short term divergences but long term convergence. In this moment of partisan campaigning and a vocally divided electorate, we are hopeful that we are witnessing a similar short term divergence. Certainly, we hope that the pandemic’s impact on our lives and our economies will turn out to be short term, and we will be able to gradually transition to longer-term stability without today’s limitations and fears.

For now, the pandemic is creating distortions in both the personal and economic sides of our lives. Additional uncertainty and stress are pressuring not only our physical health but our mental health. That background stress reduces our resilience for the short-term shocks in our personal finances. Those could include incidents as varied as unexplained water in the basement, a need to move out of an unsafe high rise apartment building, or losing a job unexpectedly.

To address the challenge of navigating small financial stresses in the present, and longer-term uncertainty in financial decision making, we emphasize a concept with clients called ‘decision sequencing.’ This is a way to be mindful in the present rather than immobilized, and leaves the future elements of important choices as the somewhat undefined opportunities they are, in the future. A focus on the parts of your life and financial planning that are really right in front of you can support calm. What lies further on will in time become your present concern, and you will have an opportunity to be mindful then. You don’t have to make all the decisions right now. And mindfulness in the present doesn’t mean mandatory decisions or action – if you lack clarity, no decision can be a good decision

The possibility in the upcoming weeks of a release of stress and a shift from uncertainty to certainty is likely to bring a wave of relief, optimism, and energy. Short term clarity from a decided election, combined with near-to-intermediate term progress on controlling the virus, could buoy our broad social mood, bring us closer to a workable stimulus program, and unleash new possibilities for action.³

We each also have the option to set ourselves up for our own ‘explosion of happiness.’ We start by being planted in the present, understanding the arc of stress and recovery in our finances and circumstances, and being willing to look at our long term landscape. If we dig into our budget gaps, take a deep breath during short-term market downturns, and think creatively now for the major changes down the road, we can be energized by knowing our own story better.

Now is a time to make the emotional investment of climbing the hill to see the view. With that perspective, you’ll gain a better sense of your next steps, and the path ahead.

¹See www.multpl.com for a variety of historical data on the S&P 500.

²Paul Vigna, “Stocks Typically Climb, Regardless of Who’s In The White House,” Wall Street Journal, October 23, 2020.

³The “explosion of happiness” concept comes courtesy of Jared Dillian, “No Fun Allowed,” The 10^th Man, October 22, 2020.