David Nelson

The year 2020 has given us plenty to worry about: our health, the economy, and geopolitics, to name a few. Because of this year’s hardships or in spite of them, it is worth considering the small victories that have been achieved as we approach Thanksgiving this week.

A narrow area that I think fits this bill is the state of the financial markets. Even with the ongoing pandemic and lingering uncertainties about the economic recovery, the returns of most assets have been surprisingly not horrible.

The stock market in particular has proven to be extremely resilient. March may seem like ages ago in a year like this, but we shouldn’t forget that the Dow Jones Industrial Average bottomed that month after falling nearly 40 percent from its peak in February.

The fact that it has since returned to all-time highs is certainly something we can appreciate and be thankful for, but there is something that we shouldn’t lose sight of: things didn’t have to turn out this way.

In his book “Fooled by Randomness”, Nassim Taleb raises the notion of alternative histories. He argues that we should not judge a decision based solely on the outcome, but instead should also consider the alternative histories that could have happened but didn’t.

For example, if I took all of my savings, bought a bunch of lottery tickets and won the jackpot, was that a good decision? Obviously if that scenario were played out many times, there would be many more instances where I would lose all of my savings rather than hitting the jackpot. However, it can be hard to separate the visible outcome from what might have happened.

That brings us to this year in financial markets. Yes, stocks have recovered, but the question individuals should be asking themselves is: was the decision to own their current stocks a good one?

Let’s consider what happened to drive the recovery in stock prices. In March, as prices collapsed, the Federal Reserve quickly undertook a massive response. They lowered interest rates to zero and committed to purchasing “at least” $700 billion in assets over a number of months with no upper limit to how much they could ultimately purchase. Additionally, they launched a number of credit facilities to provide up to $300 billion in new financing for corporations.

On the fiscal front, Congress authorized spending nearly $3 trillion to combat the effects of the pandemic. This included direct payments to individuals as well as forgivable loans to small businesses. This whopper of a number represents over 13% of the previous year’s total GDP.

This strong support from the government is certainly responsible for keeping many companies afloat that otherwise would not have made it, as well as keeping consumers spending at a level that might not have otherwise occurred (also helping businesses). It is no surprise then that risk assets, like stocks, have rallied against that backdrop.

But in the universe of alternative histories, there is no question that there would have been plenty of outcomes where all of this stimulus did not materialize, leading stock prices to remain depressed or even fall further.

So yes, we are thankful that the outcome in financial markets this year has been what it has been. Perhaps the greatest gift that this outcome has given us is that we have the chance to look at our portfolios and decide if we are comfortable with what we own.

Maybe our experience this year isn’t exactly equivalent to winning the jackpot, but we can be sure that there was plenty of risk hidden in those other histories that we managed to avoid. It is important to take this opportunity we have and see if there is a gap between what happened and what could have happened. If there is, options can be explored for addressing those risks in order to ensure the balance of risk vs. reward is an appropriate one.

Happy Thanksgiving, everyone.

David M. Nelson is the president and CEO of NelsonCorp Wealth Management.

Trending Video