S&P Gains 100% from March 2020 Low: Now what?

S&P 500 marks 100% gain since March 2020

After hitting “rock bottom” following global shutdowns related to the coronavirus in March 2020, the S&P 500 has roared ever since delivering a 100% return. You read that right: 100%.

SIDEBAR: Someone out there is highlighting this past 18 month window in their investing masterclass, illustrating that in times of financial crisis, the best action for your portfolio is inaction. Don’t sell. Be patient. Ride it out. But we digress…

What now?

After living through the shortest bear market in history, we’re now witnessing company valuations being pushed to new heights only surpassed by the dot-com bubble of the late 1990s. While this may sound unsettling, also consider that with interest rates so low, it would be equally worrying if equities weren’t expensive (reason: low interest rate yields push investors to equities).

So, at this juncture and with cash to invest, should you a) lean towards low interest fixed income that’s not (or barely) keeping up with inflation, or b) buy potentially overvalued equities? Pick your poison.

From our vantage point, choosing low interest debt or expensive equities is not an either/or proposition – everything comes back to diversification. Instead of chasing returns, we prefer the approach of aligning portfolio decisions to your unique life: your upcoming cash needs (and/or life transitions), your tax bracket, and your tolerance + ability to take risk.

While we’re not ones for reading the tea leaves, we did appreciate reviewing the latest JP Morgan Long-Term Capital Market Assumptions report. In it, they had a stark quote that stuck out:

“The price for dealing with the pandemic today comes at the cost of tomorrow’s returns in many conventional asset markets.”

Not exactly a glass half-full outlook for the road ahead.

The biggest challenges outlined by the report included:

  • Whether governments/business can rise to the climate challenge
  • Increased sovereign debt balances and an expectation for fiscal stimulus to continue
  • Stagnating globalization, companies shortening their supply chains
  • Era of US “exceptionalism” possibly coming to an end, leading to a weaker dollar

While we certainly believe that all challenges present opportunities, we feel equally strong that investors should prepare for muted annual returns over the next decade. We touched on this topic not long ago.

According to the same JP Morgan LTCMA report, over the next 10-15 years, inflation is anticipated to flatten at an overall rate of 2.0%. This is a tough pill to swallow when the same report projects compound return rates for the same period to be 1.10% for cash, 1.50% for intermediate Treasuries, and 2.50% for US investment grade corporate bonds.

For equities, the LTCMA report outlined the following predictions for the next 10-15 year investment time horizon:

  • 4.10% for US Large Cap
  • 4.60% for US Small Cap
  • 6.20% for US Value
  • 6.50% for US REITS
  • 5.20% for Euro equities
  • 6.10% for UK equities
  • 5.10% for Japanese equities
  • 6.80% for emerging market equity

Compare these expected returns to the 10% average annual return that the stock market has delivered over the last century. Not ideal.

Instead of guessing which asset class will perform best, or searching for the next Amazon to invest in, legendary investor and founder of Vanguard, John Bogle (who’s 3-fund “boring” portfolio outperformed the largest endowments in 2020, yet again), said it best:

“Don’t look for the needle in the haystack. Just buy the haystack.”

As evidence-based investors, we wholeheartedly agree with this approach.

Beware of Financial Scams

Scam Alert

A personal contact shared a story with us regarding their friend who recently fell victim to an online gift card scam.

The friend received an email from “Target” and was prompted to provide certain information to “verify their gift cards.” Unfortunately, the friend fell for the scam and within a few days had money withdrawn directly from their bank account. The impacted individual is now in the process of working with their bank to recover the stolen funds.

The State of Fraud

Scamming shows no signs of letting up. In its most recent report from the Internet Crime Complaint Center, the FBI saw the largest number of complaints, and the highest dollar losses, since the center was established 20 years ago. According to the FBI, the costliest scams involved business email compromise, romance or confidence fraud, and mimicking the account of a person or vendor known to the victim to gather personal or financial information.

How to avoid

  1. Beware of suspicious email address and fake invoices/attachments: Fraudsters are masters of deception. It’s not uncommon for them to send emails from addresses that might look familiar to you but which contain one spelling difference, or end in .net instead of .com. Never open links or attachments from email addresses that are unfamiliar. Additionally, if you receive a link or attachment that you weren’t expecting from what appears to be recognizable/legitimate email address, it never hurts to send a quick call or text to the sender to confirm.
  2. Ignore scammers pretending to be from the government: Most of us have probably received one of these phone calls. Someone reaches out on a phone call claiming to be from the IRS. In some cases, most recently, the caller will claim you are eligible for an “additional stimulus check.” In others, they’ll say you owe money and will warn that non-payment will result in legal recourse and penalties. Take note: the IRS will never make first contact via a phone call or request payment details for money-owed over the phone. If you receive a call, simply hang up the phone. The same goes for calls from the Social Security Administration and other government organizations.
  3. Be aware of the Social Security scam: Also done via phone call, the caller says your Social Security number has been linked to a crime involving drugs and/or sending money out of the country illegally. They inform you that your Social Security number is blocked and that by simply confirming your SSN and paying a small fee, it can be reactivated. Again: Hang up! The Social Security Administration will never call you on the phone and ask for your Social Security number.
  4. Scammers will tell you how to pay: All successful scams entail coercing the victim to part with sensitive information or to pay the scammer. Scammers may insist that you pay by sending money through a money transfer company. Others may suggest putting money on a gift card and then giving them the number on the back. Some will send you a check (that will later turn out to be fake), tell you to deposit it, and then send them money.
  5. Don’t fall for online pop-up warnings: Tech support scammers may try to lure you with a pop-up window that appears on your computer screen. It might look like an error message from your operating system or antivirus software. It may also use logos from trusted companies or websites. The message in the window warns of a security issue on your computer and directs you to call a phone number to get help. Simply ignore. If you are unsure of whether the message was legitimate, you can use your antivirus software to run a scan or contact the soliciting organization directly.

What to do if you are scammed

Anyone can fall victim to these scams. If you have paid someone, call your bank, money transfer app, or credit card company and see if they can reverse the charges. The Federal Reserve Board notes that if you report the fraud within two business days, liability is limited to $50. If you report it after that, you could face liability of up to $500, and if you report it after the 60-day window, subsequent fraudulent charges can wipe out your account entirely.

Final thoughts

Whether online or via phone, stay vigilant. Avoid clicking on suspicious links, and never give out personal information to a stranger over the phone. For online accounts, steer away from using short passwords which can be easily hacked by password cracker software. Instead, use strong passwords that are at least 12 digits long and contain numbers, letters, special characters, and a mix of lowercase and uppercase letters.

If you know someone who has been impacted, Identitytheft.gov is a great resource for mapping out a recovery plan.