If you’ve ever taken a long drive, you know it’s important to prepare mentally for the trip. For example, if you’ve ever driven from New England to Florida, you know that reaching the Florida border is exciting. Instinctively you think: “I’ve made it!” However, if your destination is on the southern end of the Sunshine State, the reality is you’ve only finished about two thirds of the trip. You still have a long way to go. That’s an important analogy to keep in mind as we near the end of a year that has felt like one long trip, indeed.
Obviously, we’re all hopeful 2021 will be an improvement over 2020—undoubtedly one of the most challenging years in our nation’s history, thanks mainly to a once-in-a-century pandemic. While it’s perfectly fine to look forward to the New Year, it’s also important to keep in mind that things aren’t going to just magically get better once we flip the calendar. Deep down we all know this, but psychologically we can still fall prey to unrealistic expectations. Yes, it’s true that in recent weeks we’ve had some encouraging news. However, it’s still a safe bet that most of this year’s challenges will linger long into 2021, and that new challenges will emerge along with new opportunities. In other words, our long trip is probably still far from over, and it’s up to each of us to prepare ourselves—mentally and financially—for that reality.
Good News, Bad News
As noted, there were several positive developments in November that bode well for the year ahead. No less than three drug makers announced excellent clinical trial results for their Covid-19 vaccines, and two of them—Pfizer and Moderna—have already applied for emergency use approval from the FDA. In addition, one of the most contentious presidential elections in American history was finally settled. Thanks to these and other developments, all three major stock market indexes finished the month with major gains. The S&P 500 and Nasdaq grew by 10% and 11%, respectively, while the Dow Jones Industrial Average gained 11.8% and notched its greatest single-month performance since 1987.*
Amid all this good news, however, November also brought its share of bad news, particularly where the Covid-19 crisis is concerned. In short, it was our nation’s worst month yet for the pandemic, with new cases topping 100,000 per day almost every single day, and the death rate climbing to nearly 270,000.** By comparison, remember that over the summer we were down to between 40,000 and 60,000 new cases a day. Even more troubling are concerns that families traveling for Thanksgiving may lead to an even bigger surge in new cases and deaths this winter. At this point, it’s basically a race to get a vaccine approved and widely available before hospitals are overwhelmed and another widespread economic stoppage becomes necessary.
Making the race even more urgent is the fact that Congress and the White House have yet to reach a deal on a second round of economic relief in response to the crisis, despite a broad consensus among economists and lawmakers that more aid is needed. Allianz Chief Economic Advisor Mohamed El-Erian has called this stalemate a recipe for pain, particularly considering unemployment claims began climbing again in November.***
None of these challenges will magically disappear when 2020 gives way to the new year, regardless of November’s positive developments. In fact, the pandemic and its economic impacts are likely to continue for much of 2021, with social distancing, mask-wearing, and other precautions remaining part of “normal” life for some time to come. While it’s important to prepare mentally for that, it’s just as important to prepare now for the financial challenges and opportunities that may emerge in 2021. As I discussed in last month’s newsletter, that starts with reviewing your current strategy to discuss those potential opportunities and make sure your current allocation is properly aligned with your risk tolerance.
A Good Gauge
As I also noted last month, now is a good time to do this because you can use the massive market drop that occurred in March as a gauge to measure your risk tolerance. The selloff at the start of the pandemic hit every corner of the market, and those of you invested in bonds and bond-like instruments saw your account values drop right along with those of stock market investors. Although the loss was only a paper loss and your income was unaffected, the experience may have made you realize your risk tolerance level is lower than you thought, in which case you may want to make adjustments in your portfolio to help lower your risk further.
On the other hand, you may now realize you have a higher risk tolerance level. As a result, you may want to discuss revising your portfolio to be in a position to take advantage of potential new opportunities that may emerge in 2021. You can do this while still keeping your strategic focus on income through an actively managed portfolio of high dividend-paying value stocks. Market analysts have already identified several good, undervalued dividend-paying stocks for 2021, and noted that if a vaccine is effective, many of the businesses and industries hit hardest by the pandemic may start to rebound.**** The bottom line is there may be a variety of good opportunities in the new year for investors with the right risk tolerance. However, there will also be challenges, including the potential of another major market pullback, so timing in your strategy is crucial!
That’s why it’s important to take advantage of this period of relative market strength and stability to prepare for the coming year. You can do this by setting up a meeting with our office when we contact you—or by being proactive and contacting us! As always, I also encourage you to share this newsletter and this information with friends or family you feel may benefit. Meanwhile stay safe, and Happy Holidays!
*“Dow Posts Best Month Since 1987,” Yahoo Finance, Nov. 30, 2020
**“A ‘Natural Disaster’ is Unfolding in All 50 States,” CNN, Nov. 29, 2020
***“El-Erian on Stimulus Talks: Delay Will Create… Damage,” Yahoo.com, Nov. 30, 2020
****“Here’s Where to Invest Your Money in 2021,” CNBC, Nov. 9, 2020