Cash or Stocks?
It seems like retail investors are "all in" to the stock market while many institutional investors are being very cautious about putting more money to work in this market. The fundamental question right now is whether stay in cash to be safe in case the market crashes, or put your money in stocks so you don't miss out on what will surely be a continued climb upward consistent with the long-term trend (75% of years are up, 25% are down as I discussed in a recent post). Every day I read articles forecasting doom and gloom and "1929" crash scenarios. I also read an equal number of articles saying the market is not irrational, just pricing in what it sees in the future and it will continue to slowly recover as the economy recovers. This is the age old battle between the bulls and the bears. What's an investor to do?
We know that the Federal Reserve's unprecedented provision of liquidity and the US government's massive fiscal stimulus packages (with more to come) are providing a great deal of support to the economy and the markets, which effectively puts a "floor" underneath stocks. We also know that interest rates are abysmal and you can't make a decent return on cash or bonds, while many solid stocks pay a dividend of 2% or more as I have also written about recently. Even if you believe there will be deflation, why would you settle for near zero interest rates?
COVID-19 cases and deaths continue to grow around the world and especially in the US, bringing a lot of angst and concern to the market about slowing down the economic recovery, due to roll-back of reopening activities in several states hit hard with new cases in the south and the west and also people staying home and not going out shopping, eating out, traveling, etc.
Here's a summary of last week's economic data, which for the most part is positive and would indicate a slow, but steady recovery is underway:
Key stats in the week included consumer confidence, private sector PMIs, the weekly jobless claims, and June’s nonfarm payrolls.
The all-important consumer confidence and labor market stats were largely skewed to the positive.
The CB Consumer Confidence jumped from 85.9 to 98.1, with nonfarm payrolls jumping by a record 4.8m in June.
A surge in hiring in May and June led the unemployment rate back down to 11.1%.
The weekly jobless claims were disappointing, however, rising by 1.472m following a 1.482m jump in the previous week.
In the equity markets, the NASDAQ and S&P500 rallied by 4.62% and by 4.02% respectively. The Dow ended the week up by 3.25%.
If you have a Financial Fortress already, you don't need to worry about any of this because you already have a good, diversified allocation of investments across various asset classes so you are ready for anything the economy or the markets throw at you. Your stock portfolio would just be managed "business as usual" in accordance with your objectives and risk tolerance and would continue to be fully invested. There is nothing in the data so far that would suggest it would make sense to change your strategy or go "all cash" at this time. Since it's very difficult to time the market, it's better to just stick with your strategy. If that's buying diversified index funds like SPY and QQQ periodically and holding, then keep doing that. If it's buying and holding solid dividend paying stocks, then keep doing that. If it's buying solid companies and selling call options, keep doing that. Whatever your strategy is, keep doing it and in the long run you'll be glad you did.
Of course, you will need to do your own homework and invest where you feel comfortable. I'm not recommending any particular stock or strategy. Stay safe, healthy and positive. I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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