This note will print a little long, as I want to get some informative charts in your hands and a few quick comments on each.
The weekly jobless claims report that was released this morning was not a surprise — but words can’t describe it. So here’s the chart. I’ve marked the 2009 unemployment peak and today’s 3.3 million report. We all knew this was coming, and next week’s report will likely look similar. As I said in my video to you on Friday, we are now going to see the economic impact of this pandemic as data starts to come in. The market is actually up considerably today despite this unemployment news. It’s important to remember that the markets do not necessarily describe the current economy; and the economic numbers don’t describe the daily struggle that some are feeling right now.
It’s easy to get mired in the daily grind of market volatility and miss the big picture. Here is the chart I’ve sent you frequently so you can see the context of where we are today in perspective of the last 20 years of market history. This chart is adjusted to include the reinvestment of dividends, and uses a logarithmic scale so that historical declines have the same visual impact as today’s decline.
How about even more historical perspective? Here is the US stock market, as represented by the Dow Jones Industrial Average, from 1915 through today (also a log scale). That little drop on the tail end is today’s market. Look normal? It is.
While it’s comforting to know the historical context, these charts don’t help us understand the most important question for real investors. To wit, is the price I’m paying for an investment today low enough that I can expect a reasonable future investment return on my money? For that, my preferred approach is to use the total size of the US stock market compared to the total size of the US economy (GDP), which Warren Buffett describes as “probably the best single measure of where valuations stand at any given moment.”
There are times when the total value of the stock market greatly exceeds the total value of the US economy, such as the last few years. In time, the markets will revert back to their mean value, although often the pendulum will swing down to an undervalued state, creating rare opportunities for patient investors. The current downturn has brought us close to fair value, but we’d be better off lower. Remember, the lower you buy, the higher your future returns.
If/when the markets reach that undervalued state, as they did in 2009 and prior cycles, we will back up the proverbial truck for yet another “once in a lifetime” buying opportunity. Until then, the recommendations I have been making the last two weeks stand — I’ll rebalance our portfolios in a way that is consistent with our investment strategy, and you maintain or increase your monthly automatic investments to the extent you have created financial margin in your cash flow over the past several years of good times.
Whether this bear market is ending soon or we’re just taking a break before another leg down, it’s important to recognize what type of market returns often follow bear markets. This is why you’ve seen a significant change in my tone over the past weeks versus the prior two years — from “pay off debt, save cash, and be patient,” to “increase investment contributions, rebalance, and prepare to back-up-the-truck.” The current bear market is not on the graph, but would look pretty small if it was. Patience is still in order.
Finally, I don’t have a graph for this one, but the $2 trillion coronavirus stimulus package is rapidly moving towards passage and signing. We’ll have all the details on the parts that impact clients once it’s final. But we already know that it’s not enough (see the first chart). I anticipate one or more follow up packages from both fiscal and monetary authorities in the coming days and weeks.
We’ll talk again soon… Be well!