The number of daily COVID-19 infections is heading for a second higher peak, and we now face another wave of layoffs. Still, for investors saving for the long term—retirement, college tuition and the like—stocks should be the cornerstone of a sound strategy.
Pessimism abounds among traders and professional money managers, but remember their stock-in-trade is timing markets and picking stocks that could beat overall trends in the markets. The track records of actively managed mutual funds vs. index funds reveals few can offer ordinary investors market-beating advice.
As COVID-19 gripped the country, the S&P 500 index SPX, 0.13%, which encompasses about over 80% of U.S. equities, fell 34% by late March from its February peak. As the virus came under control in the Northeast, stocks rallied but since early June, equities have exhibited considerable turbulence. Mounting infections in California, Texas, Florida and elsewhere and economic conditions abroad worry investors.
Utilities, normally stalwarts of calm because regulators guarantee their profitability, have exhibited even greater volatility than the S&P 500. That’s fear, not sound investor analysis. Gold—the ultimate fear asset—is moving up again.
Three main ideas
Investors should fix on three ideas.
- We should have a vaccine next year and treatments for the infected are emerging—the economy recovered within a few years after the Spanish flu and 1957 flu pandemic.
- The shutdowns are doing what wars, natural disasters and recessions always do—accelerate technologically driven changes that were unfolding beforehand.
- Finally, stocks are not terribly overvalued, but will become undervalued at current prices when a fix for the virus emerges and sustained growth resumes.
Those money managers who would have you flee stocks or pick winners can’t tell you when or which vaccine developer in the United States, Great Britain, China or Russia will emerge the winner. Or guarantee if any will manage a substantial profit other than to garner some national laurels.
Restaurants were already threatened by industrial kitchens and delivered meals. Now Walmart WMT, -0.51%, Target TGT, 0.41% and Costco COST, -0.51% have built digital platforms and are gaining more new online grocery customers at the expense of slower to adapt chains.
Banks will permanently close branches, because we have learned to do most mundane financial tasks online. Fast fading are tedious lobby lines, freeing employees and consumers for more productive pursuits.
Currently, the S&P 500 is selling for 28 times earnings. That is somewhat above the 25-year moving average of 25 but implies an equivalent interest rate of 3.6%. The 10-year Treasury TMUBMUSD10Y, 0.588% yield is less than 0.7%, and the Federal Reserve appears committed to keeping rates low.
Stocks outperform bonds by a considerable margin over any reasonable period and were Fed Chair Jerome Powell to push up interest rates to combat inflation, the market value of existing bonds at current low coupon rates would plunge.
For ordinary folks, except for some rainy-day money in bonds with staggered maturities, those are risky.
Gold GOLD, 0.78%, like stocks, is highly volatile, rises when uncertainty ignites fear but has underperformed the S&P 500 over the past 25 years. The recent surge likely implies its price will recede relative to stocks when the crisis passes.
Overinvesting in real estate is a poor solution too. Over the past 25 years, the average return on residential real estate in the 10-largest metro areas was 4.5%. Including dividends, it was 11.8% for the S&P 500.
The sustainable P/E has been steadily rising—in 1995, the 25-year moving average was only 14. Simply, as the global population ages, it saves more—that drives down returns on safe investments like Treasuries and pushes up sustainable stock prices.
Currently, the 12-month forward P/E for the S&P 500 is about 22 but as soon as a vaccine emerges, prospective corporate earnings will surge. Investors who stick with stocks should be rewarded.
My advice remains through storms and sunshine, the soundest long-term choice for ordinary folks is S&P 500 index funds and similar instruments.
Put a bit in every payday and retire nicely.