Since late March, assets have appreciated wildly. Bonds appreciated so much, many yields are now effectively zero. Stock markets recently hit record highs. Even gold reached new highs. Yet, we are in a pandemic where much of the economy has been shut down.
What is going on?
Clearly, the stock market thought that the economy was going to be roaring back, but there is more to this than meets the eye. The reason that all markets seemed to be appreciating all at once can only be due to one thing: more demand than there is supply. Demand is driven by investors having a lot of money to invest. With the COVID-19 pandemic, the government has used monetary and fiscal economic stimulus policies to flush liquidity into the economy. This, along with increased savings rate, has bid up assets.
Is this even sustainable?
Only if the stimulus packages keep happening, which is unlikely, or if indeed the economy does come roaring back, which is more likely. Does it make sense to invest in what seems like a bubble? It depends on your unique circumstances, and in particular, if you are already invested and have benefited so far from the appreciation, but generally being invested makes more sense than not. As the saying goes, it’s time in the market, not timing the market, that allows investors to make money.
Timing the market can be dangerous. I like to use the analogy of a surfer sitting on the beach and another sitting on his board out in the ocean. Who is going to catch the big wave? Obviously, the surfer on the beach, noticing a big wave coming, is going to get crushed by the wave as he desperately paddles out to catch it, whereas the patient surfer, waiting for that wave, can enjoy the ride.
No matter what happens, never underestimate the human spirit. Where there is a will, there is a way. Businesses will figure it out and come back stronger than ever. My role is to be sure you are appropriately invested and in the right businesses for the long term. Investing is more about allocating your assets than it is about timing those allocations. You have to be invested to catch the Big Wave.