LGT's Profit Sense

Just 12 short months ago most of us were living in a world focused on the hope of a new decade; for some a “fresh start” with “2020 Vision”. Those were the days. Common headlines polarized international trade tensions, US presidential impeachment hearings and upcoming elections, wildfires ravaging Australia, and increasing gun violence issues.

Those still invested were closing out a year of positive returns in most equity sectors, while the fixed income market showed signs of disparity with record low yields. The Federal Reserve had stalled rate decreases after the third 0.25% decline in October as a seemingly early attempt to continue the equity rally. Talk was widespread of rates potentially easing into negative territory in the upcoming months. As of the week ending December 21, 2019 the initial jobless claims by Americans was 222,000, and the unemployment rate for insured workers was 1.2%. Personally, I was excited for the annual Winter Classic hockey game being played for the first time at the Cotton Bowl in Dallas. A few friends and our spouses trudged through the crowds of people to our seats on the first day of the year to help cheer on the then-struggling Dallas Stars to a win over the visiting Nashville Predators.

The Cotton Bowl crammed over 85,000 people into the stadium that morning, and the only reason someone might have been donning a mask over their face was for warmth.

Yet, gaining more attention in the abundance of news were reports of a unique SARS-like illness that had struck a small community of individuals in the densely populated region of Wuhan, China. The impending 12 months forced an unimaginable paradigm shift in everyday life.

In terms of wealth health, 2020 will be a benchmark year to analyze risk tolerance, future portfolio stress testing, and overall financial status in relation to planned goals. The current state of the economy and markets still sits in a volatile limbo, but the overall trends are positive for the long term. A few factors have led to the outcomes of this year. First, the Federal Open Market Committee of the Federal Reserve took swift action to buoy equity markets from further meltdown by slashing the Fed Funds target rate by 0.50% to 1.0-1.25% on March 3^rd, then a subsequent 1.00% reduction to 0.0-0.25% on March 16^th. Furthermore, trillions of dollars of various debt instruments were re-opened for purchases by the Federal Reserve during Q1 in order to inject dollars into the struggling economy. Another action taken to curb further declines was fiscal policies enacted like the $2.2T CARES Act. In a matter of a few weeks the onslaught on the economy and markets had stalled, and a record-setting recovery was in the midst. As for the fixed income market, investors that remained diligent throughout the beginning of the year were rewarded with steady returns from more conservative investments despite the across-the-board rate decreases.

Chart showing intra-year performance of various indices in 2020 through November 30^th.

Knee jerk reactions to liquidate in a late attempt to exit the collapsing market during March did not bode well for performance during subsequent quarters. Of course the bottom of the market is unknown until it is in the rearview mirror, but the strategy of unnecessarily altering plans stemming from the inability to stomach short-term turbulence points to a bigger risk tolerance imbalance. Nonetheless, it was difficult for anyone to stomach the bleak outlook for the US that was being voiced through media outlets everywhere.

Although there has been numerous occasions of short-term volatility in the equity markets throughout the year, March marked the end of a market freefall and the beginning of a historic rebound. Somewhat similar has been the labor market, but recent surges of coronavirus cases and subsequent re-shutting down of businesses is a current unknown for some employees. At its peak the initial claims for unemployment benefits reached over 6.8M in late March, taking the effective unemployment rate to over 15.5% by the jobless claims report released May 7^th. Since then the unemployment rate has trended downwards to 712,000 initial claims during the week ending November 28^th, and reducing the unemployment rate to 3.8%. Many unknowns lie ahead for the labor market as a resurgence of coronavirus cases globally has already resulted in regions backtracking on re-opening policies for businesses, likely leading to an uptick in layoffs over the next few months.

Of the roughly 22 million jobs lost due to the pandemic, only about half of those vacancies have been recovered, leaving the workforce with 9.8 million less jobs than pre-pandemic.

Another economic factor to consider in 2020 is the US Gross Domestic Product (GDP), which was not unscathed from the impact of the pandemic. While the US GDP annual growth rate has not surpassed the 5% level since 2000, 2020 produced staggering numbers of 0.3% for Q1, -9.0% for Q2, and -2.9% in Q3. US GDP expansion during the same three quarters was in fact two contractionary quarters of -5% in Q1 and -31.4% in Q2, then back into a record-breaking expansion of 33.1% in Q3. How to effectively navigate uncertainty fueled by the pandemic has been the key question for wealth-minded individuals.

As a new year approaches the focus has shifted to a reality of new US leadership, rising coronavirus cases on a global level, civil unrest, and the strategic delivery of coronavirus vaccines. New stimulus packages are under deliberation that could bolster the economy for another short period, but the level of aid the package entails is still pending guidance and approval. As for a vaccine, the laundry list of “what if’s” seems to overshadow the potentially life-changing effects it could have on life post-2020. Not only are tests still ongoing but a strategy for distribution and implementation could further delay action. All of this culminating with a new Commander in Chief being sworn in in January 2021 has led to a sharp contrast of opinions when viewing the outlook of wealth security in the coming years. New policies will be implemented with new presidential leadership, new headlines will be made that impact the short-term health of the market and economy, and new norms will continue to be accepted as we collectively adapt lifestyle changes to halt the spread of the coronavirus.

While uncertainty remains, it is clear that during unprecedented years such as 2020 it is imperative to have a plan of action to help remain diligent through extreme volatility.

Each situation is different and requires attention to detail in differing segments from person to person. Trusting the needle of a financial compass guided by a personalized, comprehensive plan is the unparalleled best option when trying to manage wealth in any situation. 2020 has provided a “worst of times” benchmark, but acting on the data to incorporate proven strategies into a financial plan can be the deciding factor between wealth failure and wealth prosperity. We invite all the opportunities provided in 2021, and look forward to continuing the role of trusted advisor for so many individuals on a prosperous wealth path.

It is time to make a plan for future security.

We can help.