Investing after the 'great reset'

The COVID-19 pandemic has upended lives, the economy and markets around the world, leading many investors to ask whether things will be different going forward. Is it time to abandon traditional portfolios and embrace alternatives such as gold? The short answer is no.

“There is a reason we feel like so much has happened in this very limited period of time,” Kara Murphy, chief investment officer at Goldman Sachs Personal Wealth Management, told the InvestmentNews virtual Women Adviser Summit Tuesday.

While the market's drop of about 33% earlier this year is fairly typical of virtually every recession in the post-World War II era, the speed of this year’s market rout and subsequent recovery is unique, Murphy said.

Typically, it takes the stock market about 12 months to decline and reach its bottom. In 2020, the peak-to-trough slide was accomplished in one month. And while it normally takes the market about two years to rebound, this year the bear was coaxed back into its cave within five months.

“This is the great reset,” Murphy said. She said advisers can use the market's precipitous decline in March and subsequent rebound as a “lifeboat drill” to gauge clients’ risk tolerance going forward.

“It is hard to see the stock market close near previous highs when you see boarded up storefronts,” she acknowledged. “But Wall Street is not Main Street. The market is forward-looking. It is not telling us what is happening today, but what it thinks will happen a year from now, and the market is telling us the economic recovery is going to continue.”

 A poll of attendees at the Women Adviser Summit showed 45% would focus on investment strategies as a top priority of their year-end reviews with clients, followed by discussions of retirement goals, tax planning and health care concerns.

Murphy expects interest rates to remain very low for a long time, possibly five to 10 years. Yet that is not a reason for investors to abandon bonds, particularly those in or near retirement who need bonds to reduce volatility in a balanced portfolio. And for clients who have taxable money, municipal bonds are still very attractive, she said.

Although the federal government’s massive stimulus efforts in recent months will likely boost debt to 100% of the GDP or beyond, interest rates are at historic lows, so that deficit is not a drag on economic growth for now. “We have plenty of time to figure it out,” Murphy said. “But we can’t never figure it out.”

Given the extraordinary times, should investors embrace gold as the ultimate hedge against uncertainty?

“No, while gold prices keep going up, think about previous periods when gold prices come right back down,” Murphy said.

“Play it straight. Equities and bonds have an incredibly consistent history of providing returns over time,” she said. “Build wealth in those asset classes and stick with what works.”

While presidential politics may be occupying the headlines, data from past elections suggest the economy is responding less to who occupies the White House than to who controls Congress and whether legislative power in concentrated in a single party or divided between the two.

“When we look at market performance, there is no discernable difference between a Democratic and Republican president,” said Murphy, who spent her early career as a political economic analyst. “But we do see a difference between a divided government, where one party controls the House and the other the Senate.”

A divided government has a better market trajectory than a single party and it doesn’t matter whether the single party is Democratic or Republican.

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