Fueled by optimism about reopening the U.S. economy and a record-breaking employment report for May, stocks started the month moving in a positive direction. By Monday, June 8th, the S&P 500 actually closed in positive territory for the year. The euphoria would not last long. By the middle of that same week, the Federal Reserve released minutes from its Open Market Committee (FOMC) meeting that included comments about the “ongoing health crisis” and how it “will weigh heavily on economic activity, employment, inflation in the near term, and poses considerable risks to the economic outlook over the medium term”. That dose of economic reality, a weekly unemployment report revealing an additional 1.5 million seeking relief benefits, and further evidence of new coronavirus cases sent the market nearly 7% lower the very next day. It was the market’s biggest selloff in three months.
The middle of June saw the markets whipsawed – trading down as much as 8.25% from the June 8th high – only to regain some three quarters of the loss by June 16th. Volatility remained the catchphrase throughout the last full week of the month as stocks traded in nearly a 2% range every day until the final Friday of the month. When stocks opened for trading on June 22nd, concerns about rising coronavirus cases led it lower in the morning. But stocks reversed course and were positive by the end of the day. After trading in a very narrow range on Tuesday, prices once again succumbed to pessimism for the remainder of the week and ended roughly 3.5% lower by the close on Friday.
The last two days of June saw markets rally more than 3% to close both the month and the quarter higher. In fact, the second quarter of 2020 was the best since 1998. Viewing June’s performance in a vacuum would have been enough to rattle even seasoned investors. Yet in a broader context, it may be remembered as contributing to one of the best three-month rallies in history.
The whole point of describing June’s roller coaster ride is simply to comment on stock market volatility. Sure, it can be unnerving. That is especially the case when the swings have been as wide as they were last month. Still, these are peculiar times. There is a great deal of uncertainty. And that uncertainty has manifested itself in a pretty volatile market since March. But the reality is that market fluctuation is normal. While the swings so far in 2020 may have been more dramatic than historical norms, the fact remains that there isn’t anything extraordinary about market volatility. The important takeaway is to take it in stride.
One of the primary risks of stock ownership is reacting to volatility. Rashly selling into a declining market serves only to derail a meticulous plan. It can create permanent losses or unnecessary capital gains. And, typically, those who sell in haste often miss market reversals and future rallies. We guide clients to own equities as part of their durable financial plans. They are intended as long-term investments. The primary benefit of owning stocks is the superior return they provide over the long haul. And that’s the whole point.
Deliberate investors seeking long-term returns to finance future consumption goals must look to the stock market. Their durable returns have historically outpaced most other forms of financial assets. The superior returns equities provide over other asset classes is compensation for holding them when the road gets bumpy. So, we caution clients to not get unnerved as we ride out the current environment with an optimistic eye on the future.
One Last Point About Volatility
During uncertain times a program of dollar cost averaging can help smooth out the cost of a desired investment. It can also help alleviate the anxiety of making a large investment all at once. This is especially the case when markets are volatile. The chart below illustrates separate points when an investor might have made routine monthly investments over the last year. Our example uses the exchange traded fund (ETF) that mimics the performance of the S&P 500.
In some cases, dollar cost averaging can lower an investment’s cost basis. But even when markets are rising, dollar cost averaging doesn’t significantly increase an investor’s basis. The table below illustrates what an investor following a monthly dollar cost averaging routine would have paid for the SPDR S&P 500 ETF if purchases were made at the opening price on the first day of trading each month for the last year.
(Source: Yahoo Finance)
Investors worried about making new investments because of market volatility can be well served to follow a dollar cost averaging program. Those concerned about market declines actually make the best case for the practice.
Articles We’re Reading
Opinion: The S&P 500 is cheaper — and more profitable — than you think…(link)
How Public Opinion Has Moved on Black Lives Matter…(link)
Most people want to keep working from home after COVID…(link)
For the Month Ending 6/30/2020 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
Presidential elections don’t matter…at least to the stock market…
Studies show that stock market returns during election years have generally been positive – regardless of which party wins. Between 1928 and 2016, the market has been lower only four times during a presidential election year…(link)
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.