The year 2020 is only half over, but it has already heavily tested investors' mettle. The coronavirus pandemic caught the world by surprise and introduced unprecedented uncertainty and volatility into equities markets. However, the stock market has undergone a dramatic recovery since March's big crash, and the S&P 500 index is now roughly flat on the year.
Much of the market's remarkable resilience is rooted in efforts taken by the U.S. government, the Federal Reserve, and other countries and financial institutions to cut lending rates, inject stimulus funds, and implement other policies to buttress economies and equities markets. That makes evaluating the overall health of the market more difficult in some ways, and investors are now tasked with charting their stock-related strategies and activities for the rest of the year.
There are compelling rationales for continuing to buy and for staying on the sidelines.
^SPX data by YCharts. Image source: YCharts.
The "Buy" argument: Because stocks look attractive relative to other investment classes
The Fed lending rate has been cut to roughly 0% and is likely to remain at that level for the foreseeable future. That lending environment has spill-over effects, including lowering bond yields and making it more difficult to find savings accounts that offer attractive interest rates.
The yield on a 10-year U.S. Treasury bond sits at just 0.55%. Even if you are concerned about the possibility of another dramatic stock market crash, you might be better off embracing that possibility and throwing your funds in with a recession-resistant business that also pays a substantial dividend yield.
Investing in the housing market may also be a fraught proposition at the moment. U.S. home prices remain near record highs, but the disruption that the coronavirus pandemic is bringing to the housing and property market has increased the potential risk of a housing crash.
According to research from Apartment List, roughly 32% of Americans missed a housing payment in July. Based on the current outlook on negotiations between the Democrats and Republicans in Congress over a potential relief package, it looks like the extra federal unemployment benefits previously implemented in response to conditions created by COVID-19 will be significantly reduced. If that winds up being the case, the housing market could feel additional strain.
Moves from national governments and federal banks have undoubtedly played a big role in the stock market's remarkable comeback, but investors are looking for somewhere to put their money, and stocks look pretty appealing compared to many of the alternatives. You can still find promising companies trading at long-term discounts, particularly if you focus on businesses that are somewhat insulated from the operating and economic difficulties created by the virus.
Image source: Getty Images.
The "Wait" argument: Because the market is disconnected from the economy
The stock market's resilience amid myriad challenges reflects economic stimulus measures and a belief that the global economy will return to its trajectory of long-term growth after headwinds stemming from the coronavirus pandemic recede. So far, economic indicators -- including monthly new job additions (or subtractions) and corporate earnings reports over the last couple of quarters -- have come in better than anticipated. On the other hand, it's clear that stock prices have become decoupled from the current economic realities.
Few people would have believed you last year if you told them that 2020's stock market conditions would be defined by a pandemic that resulted in quarantines, people working from home, and social distancing measures. If you told them that the S&P 500 index would also close out July at roughly the same level that it was at the end of 2019, they might have thought you were crazy or wondered what new technological breakthrough had occurred to boost stock prices.
No such tech breakthrough has emerged, and it's likely that negative impacts from the virus will be felt for years to come. Yelp recently reported that 55% of businesses on its platform that were forced to close due to the pandemic have since moved their status from temporarily closed to permanently closed.
Some large enterprises will benefit from reduced competition, but COVID-19 and the associated shift in business operations and consumer behavior will continue creating economic headwinds. It's reasonable to think that conditions created by the virus could lead to another substantial pullback for the stock market in the not-too-distant future.
What should investors do?
If you don't already have an emergency fund in place, taking a cautious approach or waiting to invest is probably the right move. The outlook for the remainder of the year remains very uncertain, and relatively high equity prices amid challenging economic conditions suggest that more turbulence could be on the horizon.
On the other hand, investors who are approaching stocks with a long-term, buy-and-hold approach still have promising options on the table even if the remainder of the year brings additional bouts of volatility. The current investing climate is defined by elevated risk, but there are still avenues to strong gains provided that you prioritize finding high-quality companies built for success over the long haul.
