A Market No One Could Predict

Close your eyes and imagine you are transported back to the end of December. I tell you that next year, a highly infectious and deadly, respiratory virus will break out in China. It will not be contained and will spread to every country in the world within a few months, infecting millions and killing hundreds of thousands of people. International travel will slow dramatically and almost stop. In mid March, schools in the US will close, followed by state mandated orders for restaurants, bars, and all ‘non-essential’ businesses to shutter. People will be asked to stay-at-home except for essential needs and work.

Entire segments of the economy come to a full stop, and more than 40 million Americans file for unemployment benefits. The Federal Reserve slashes interest rates to zero on a Sunday and announces unlimited purchases of bonds, including high yield bonds and ETFs, to provide liquidity to the financial system. Congress unanimously passes a $2 Trillion stimulus relief bill to keep the economy on life support until activity can resume.

Almost 2 million Americans will fall ill with the new virus by early June and more than 100,000 will die.

Now, what do you think would happen to the stock market?

If I’m being honest, my guess would be the market is down -40-50% at this point.

Instead, the S&P 500 Index is down only -3.5% since the beginning of the year, and the tech heavy Nasdaq 100 is up more than 10%! This doesn’t mean everything is rosy. Small cap stocks are still down almost -13% year to date, and International stocks are down almost -11%. But all of these numbers wildly exceed my expectations given everything that has happened.

Year to Date Performance of S&P 500 Index Nasdaq 100 MSCI EAFE Russell 2000

Now repeat the exercise above, only this time imagine you are transported to June 2019. I tell that all of the same scary stuff will happen within a year and ask you to predict what happens to the market. I am willing to bet that no one would predict that the S&P 500 Index would be up 13.5% a year later. But that is what has happened. Again small caps and International stocks are trailing, but they are almost at the same levels as one year ago today.

1 Year Performance of S&P 500 Nasdaq 100 MSCI EAFE Russell 2000 Index

No economist had a global pandemic in their forecast for 2020. But even with perfect knowledge of what would transpire in this crazy year, no one would have predicted what we are seeing in the stock market. This proves that market timing is a losing proposition.

Some investors, both professional and amateur alike, may get lucky.  Some short-term trading strategies may work for a while, until they don’t. Some hedge funds managers may be able to exploit tiny inefficiencies in the market with leverage until they become too large and crowd out the trade. But for the rest of us, and by that I mean most of us, isn’t it time to throw in the towel and admit that plain, old, boring, long-term, asset allocation and diversification is the only reliable method of investing?


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