August Market Update

We hope you are doing well. Here is a recap of market performance for the month of August and year-to-date:

The chart shows that the S&P 500 has fully recouped the losses suffered in congruence with the COVID-19 pandemic, while US small stocks and international stocks are still in this process. Bonds were down in August, but still up comfortably for the calendar year. Despite this differentiation in performance, as an asset class, stocks of all types are up significantly since global markets bottomed in March.

One of the challenges investors consistently face is how to manage investments that vary in short-term performance. We all want the same thing – high returns all the time. But often, investment returns diverge from one another. This means investors have to make choices about how to respond when this happens.

Consider the following chart, which shows three different exchange traded funds, which track the energy, financial, and technology sectors of the S&P 500. It shows the annualized returns of each sector over three timeframes:

Here are some conclusions we draw from this data:

  • Stocks are stocks – In general, over the very long run, the returns from owning two different stock investments should roughly be equivalent to each other, all else being equal. Over the 20+ year period since 2000, the chart shows that the total returns of energy, financial, and technology stocks are within a few percentage points of each other.
  • Returns can fluctuate – Over shorter time frames, certain investments absolutely can and do perform differently from each other. Energy stocks returned almost 17% more per year than technology during the 2000s, and then technology beat energy by over 19% per year in the following decade.
  • The future is uncertain – It’s human nature to favor current or recently-past events, and we tend to expect tomorrow to look like today. This phenomenon is called recency bias, and it can negatively impact our assumptions about the future. Two weeks ago, James Altucher wrote an essay entitled, “New York City is Dead Forever” detailing why he thought New York would never be the same after coronavirus. This is a great example of extrapolating recent events into the future to make questionable assumptions.

We’re happy to report stocks are continuing their upward march. As always, the markets provide us with much to think about. If you would like to discuss your portfolio in further detail, please contact me directly.

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