Coronavirus and the stock market: 6 months later

It's been around 6 months since we looked at the Coronavirus and the stock market and the follow-up to that article, Recession, bear market and more fun stuff that looked into more details as to the future of the stock market. It's the perfect time for an update, considering the rollercoaster that this year has been. How has the world evolved since then? Also, has it really been 6 months? I had to check the calendar a few times, but it seems so. I can't tell if it's been 2 months or 2 years at this point.

In case you missed these earlier articles, we discussed how the stock market would react in the face of the unprecedented pandemic that we've had to deal with this year, after a steep decline that had the markets enter bear territory on March 11. The only correct answer was of course: who knows? Now, you might think I don't know what I'm talking about, that I should go back to the drawing board and learn more about financial markets so that I can provide a proper answer. But you'd be dead wrong! The reality is the same now as it was 6 months ago: few people can reliably predict the stock market. I just understand that fact, and the limit of my predictions, hence why my answer was and still is "who knows?". The more you know about a topic, the more you understand the limitation of your knowledge.

So with all that said, where are we now? Turns out both the NYSE and the TSX are back somewhat on track. As of today, COVID-19 has been a bleep on the radar (strictly on the stock market side of course, we're still living through the other effects of the pandemic). If you fell in a coma in February and woke up today, you wouldn't even know that the market dropped.

US stock market performance

Canada stock market performance

As you can see, they're both doing fairly well. The US market in general has completely regained its loss of the past 6 months, while the Canadian market is on the way there without getting back to its all-time high. One key difference is that there are more tech companies in the US than in Canada, and they're the ones leading most of the recovery. In general, tech companies have been the least impacted by the measures imposed all around the world by government, as they serve themselves well to a work-from-home environment. On top of that, everyone is home, making the internet a huge source of entertainment for everyone, even more than before.

This is why a balanced and diversified portfolio is so important! You never know which sector will be strong in the future, so owning all of them allows you to benefit from the leading one, without the downside of sector risk. Today, COVID-19 has helped tech companies stay strong while most of the rest of the economy is having a hard time. Tomorrow, another sector could overperform.

If you're in Canada 🇨🇦

Your portfolio probably has a home bias which has been shown historically to not underperform in the long run, while reducing currency risk. But owning equities from the US, international and emerging markets as well will help counteract the time when the Canadian market lags them in performance. Just like with economic sectors, being globally diversified helps us reduce risk.

To showcase this, Vanguard's all-in-one ETFs (VEQT, VGRO, and VBAL) are at an all-time high, even though the Canadian market as a whole as not fully recovered yet.

So the advice of doing nothing with your investments was a good one, at least until now. Was I able to foresee the future? Of course not. Anyone who tells you they can is full of themselves. But what I do know, is that over time, the stock market goes up. Some companies will do well, others will go bankrupt, but by betting on the market as a whole instead of betting on individual companies, I can benefit from it. Based on that, what will I be doing with my investments in the next 6 months? Nothing, of course. I will not sell my current investments and I will continue to add money every month. Does that remind you anything? It's exactly what I said in Coronavirus and the stock market so it didn't change.

In 30 years, all of this will be a distant memory. There will be living adults that will not have experienced this pandemic, just like there are adults today that have not lived through the world wars or the dot-com bust of the 2000. Stock markets survived all of these events and many more. It's also good to remember that when looking at stock market charts, it ignores all the dividends that were given out every year. As an investor, you would be up a bit if you were to include it. And you should, the dividend is just as important as the capital appreciation.

Remember, if you're not sure what to do, ask yourself: what would this cat do?

You know the answer... do nothing, in case you missed it. Stick to your investment plan. On an unrelated note, is it 2021 already?

P.S.: It's important to note that the stock market going well does not mean the economy is doing well. This is a common misconception. The public companies comprising the stock market are an important part of the economy, but not the only ones. Private companies, especially small and medium businesses, are the ones providing most employment opportunities, and many are struggling right now. On top of that, a majority of public companies are still struggling, but other public companies are balancing it out by doing very well. This distinction is important to make, as people are quick to associate the stock market with the economy. They are linked but are not representative of each other.