The impact of COVID-19 continues to touch our lives in a profound way. The recent surge in cases, combined with uncertainty over its impact from both a health and economic perspective, has created an anxiety unparalleled in our lifetime. Add to that a national election on the immediate horizon, and our challenge is to move forward with a confidence that the global community is addressing these unknowns in pursuit of a better future for everyone.
We know that 2020 began with an optimistic outlook, but as the coronavirus began to spread, the longest-running bull market in history turned into the fastest bear market in history. After reaching a high point on Feb. 18, it took slightly more than a month for the S&P 500 Index to reach its low point of 2,191, a decline of 35 percent.
The precipitous market decline was followed by another record: the largest 50-day advance in history. There continues to be debate about the current stock market levels within an economic decline not seen since the Great Depression.
Several factors have led to a market rebound as of this writing, including:
- The Federal Reserve’s injection of money into the economy, offsetting the depressive impact of the coronavirus.
- Because the S&P 500 index is capitalization weighted, its price is driven by relatively few large-cap stocks, including Amazon, Apple, and Microsoft, which have experienced minimal impact to earnings.
- A lack of investing alternatives. Currently the yield on the S&P 500 Index is at 1.9 percent, compared to the yield on the 10-year Treasury note at .7 percent.
Many financial institutions share a belief that global equities are likely to generate annualized returns of about 7 percent over the next decade and beyond, significantly below the historical average of 10 percent, and fixed income yields of 2.5 percent for intermediate-term investment grade corporate bonds.
It is impossible to predict the future, but these forecasted returns are a realistic expectation to use for portfolio projections in your financial plan, recognizing the need to make adjustments along the way. Focusing on longer-term returns amid the current unknowns allows you to attend to financial-planning issues that matter and are in your control.
While the global community hopes for a speedy solution to the health crisis and return to some type of economic normalcy, it is quite likely that the next few years will be wrought with setbacks on all fronts.
Staying committed to your financial plan amid the uncertainty of the moment maximizes one’s chances of reaching longer-term financial goals.