On Monday March 23rd, as I sat thinking about my quarterly letter, the Standard & Poor’s 500 Stock Index closed at 2,237.4. Today, as I sit thinking about this letter, the S & P Index sits at 3,171.4 up 41% not counting income. Just 105 days ago the Covid-19 Virus was surging, the worldwide economy was faltering, and the outlook was bleak. Most stock market pundits were predicting a flat to slowly rising stock market, at best, for the balance of this year. So here we are. Why?
On June 22nd CNBC reported that investors held nearly 5 trillion dollars in money market instruments. Short term interest rates are near zero (the 9-month Treasury bill was yielding .14% today). Therefore, investors are seeking alternatives to earn a higher rate of return on investments as The Federal Reserve Board has announced the intention to keep interest rates low for an extended period. In addition, the economy has shown improvement, while growth in Covid-19 cases has slowed. In many cases, stocks appear to be priced based on more normal earning power as investors look past the current economic slowdown to economic recovery.
Stock market action will continue to provide a bumpy ride, dependent on the latest Covid-19 and economic news. I believe the best course is to maintain target asset allocation. The chart below demonstrates that missing just a few up days in the stock market can have a very detrimental impact on long term investment returns. With that in mind, we will continue to invest in shares of well managed companies, providing needed products and services.