The market has gone up; is it about to come down?

Predicting the future is notoriously hard impossible. Despite this, most financial advisors feel daily pressure to prognosticate about what’s to come. 

“What is the stock market going to do?”

We hear this question constantly—not always spoken, but implicit in every request for advice.

We don’t always get our predictions right. The advisor for Henry Ford’s attorney famously warned him against investing in the new car company, telling him, “The horse is here to stay, but the automobile is only a novelty—a fad.”

An article of my own, “Should you be concerned about the ‘Coronavirus Crash’?”, written weeks before the pandemic shutdown, was meant to calm clients after a tumultuous week of market drops. Those initial drops seem modest now.

Of course, no one knew what was in store for 2020. Some have humorously imagined what it would be like to try to explain to our earlier selves what is happening, precisely because everything seems so unprecedented. We would have hardly believed it—and we’re just halfway through the year. 

The truth is that the future is no more or less ambiguous than it was before. Recent events have only reminded us of its unpredictability. Uncertainty reigns. And even still, you can turn on the news any hour of the day to get a prediction. Some economists and advisors act as modern, secular Seers, prophesying for the masses. They read the cryptic signs and seasons to see what they portend. And still we don’t know. Be careful listening to anyone who believes otherwise, regardless of how confident they sound. As Warren Buffett said, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

The current predictions fall into two big camps, which I’ll call the Doomsdayers and the Downplayers. The Doomsdayers point out how unprecedented everything has been: how increases in unemployment have broken new records, how quickly we fell into a recession when the shutdowns were implemented, and how fast the market dropped after the longest bull run in history. I heard one commentator explain how we’re headed into a drop too big to be called a “recession” and not big enough to be a “depression.” “We’ll have to come up with a new word for it,” he explained, as if discovering a new element on the periodic table.

The Doomsdayers look at how fast the stock market has bounced back with skepticism. For them, it seems too good to be true that these market gains will remain. After all, these levels were new records only last fall, when earnings were high and unemployment was super low.

The Downplayers acknowledge the challenges, but point out all the glimmers of hope. Although we just went through the steepest economic decline since the Great Depression, it also appears the decline may also be the shortest. As states open up, there are already signs economies are improving. The unemployment tide looks to be turning, with rates dropping again. Congress and Federal Banks poured out trillions of dollars into the economy. Payroll taxes (revenue collected as Americans get paid) dropped during the shutdowns, but they are now back up and higher than they were this time in 2015 (the last year with the same number of working days in the calendar year-to-date).

Doomsdayers or Downplayers? We have no idea which is right. If we’re being frank, no one does. We don’t know what the end of this year will bring any more than you do. There are plausible arguments on each side (and of course, in between). But unforeseen events could change everything, any day. It’s almost as if New Testament writer James was directly addressing our situation today:

“Now listen, you who say, ‘Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.’ Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. Instead, you ought to say, ‘If it is the Lord’s will, we will live and do this or that.’ As it is, you boast in your arrogant schemes. All such boasting is evil. If anyone, then, knows the good they ought to do and doesn’t do it, it is sin for them.” – James 4:13-17 (NIV)

So, if no one knows, what action should we take? Does admitting ignorance about the future mean that nothing proactive can be done? Not at all. The scripture above doesn’t say not to make plans. It says to make plans with an open-handedness, with a prudence that includes humility. As the passage concludes, the important thing is focusing on what we as individuals can control (“the good we ought to do”). 

What is “the good” we ought to do? Perhaps there are plans that need to be made that have been put off for too long. Or maybe it has nothing to do with investing and everything to do with giving right now. In the money arena, I (of course) highly recommend working with a financial planner to develop a personalized plan, custom-built for your situation. Every person’s financial situation is unique, but there are some guiding principles that apply to everyone.  

Here are the top ways we’re helping clients prepare for an uncertain future:

1. Maintain healthy cash reserves. The coronavirus shutdown is a macro-illustration for what happens at a micro-level all the time. Surprises can arise at any time, whether they are personal or global. You never know when you’ll need your emergency reserves, and that’s exactly why we preach saving all the time. 
   
2. Invest for the long-term. Short-term thinking is what leads investors to “go to cash” (sell their investments) in the middle of a crisis—the worst time to do so. If you received a surprise appraisal on your house that was 30 to 40 percent lower than you expected, would your first instinct be to sell your home as soon as possible? Not in most cases. But people make that quick-to-sell decision with their stock market investments all the time. A better strategy is pairing an appropriate allocation to your long-term plans and maintaining that strategy.
   
3. Harvest gains before they’re needed. Since investing is long-term, the money you need for the short-term should not be invested. For those needing liquidity (or the ability to access funds quickly) from a portfolio, that usually means harvesting gains long before they’re needed. With the market rebound, some are doing that now to keep many months of cash reserves set aside.
   
4. Make progress on what you can control. There are most likely initiatives in your own finances that need attention. Many are using 2020 to update their estate plan. Others are focused on more strategic giving. If you’re looking for next steps to take yourself, consider our Monthly Financial To-Dos list for ideas.

Finally, there is one type of future that is more easily predicted—your own. Specifically, your own personal trajectory can be projected from your current habits. I enjoyed a recent post by Darius Foroux that said it this way:

“Predicting your personal future is as simple as asking yourself a few questions.

• Do you eat junk food? In 10 years you’ll be…unhealthier.
• Do you complain? Your life’s situation will be exactly the same in 10 years.
• Do you lounge in your office chair all day and watch YouTube videos instead of doing hard things? You’ll be stuck at that same job. Or worse, you’ll get fired.
• Do you spend more than you earn? In 10 years, you’ll worry about money every single day.” – Darius Foroux

Wise words. You could add positive examples as well: Are you practicing daily gratitude? In 10 years, you’ll be more content. Your daily practice is more important than what I think the S&P 500 will do in the next 30 trading days. We would all do well to stress less on what is outside of our control—in our own lives and in the world at large—and take the next right step instead.

Need help making personal progress in your financial plan? Contact one of our Wealth Advisors to discuss your goals today.

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