Anyone else need a hug?
These past few days have been trying for all of us, making us realize the value of life, and how fragile it can be. Our economy and standard of living are both showing cracks. I’ll be the first to admit that I underestimated the potential economic impact of the Covid-19 virus. Now is the time to pay attention to factual evidence, credible information, and to manage our emotions.
The famed Fred Rodgers said: “Out of periods of losing come the greatest striving toward a new winning streak.” What we are faced with today and how we react will shape and define a “new winning streak” in the coming years.
So what do we do with our money through all of this?
Expect volatility. As you know, we’ve been expecting a slow down in the markets, and potential recession for 2 to 3 years now. Never in a million years would I have guessed it would have happened due to something like this. The good news is our perspective has shaped how your money is invested—and your portfolio is aligned with your unique investment profile. So while we hear about record setting volatility, that doesn’t necessarily reflect what you’re experiencing in your accounts. Please maintain this perspective in the coming weeks and months.
In our reviews with you we talk about the importance of having a financial plan, ourcray financial planning process is WealthCheck—designed to prepare for unexpected shocks like this one. With WealthCheck we use something called Monte Carlo simulation, which uses statistics to model potential outcomes in your financial plan and life. And the output of WealthCheck is a likelihood of success percentage…this allows us to focus on what we can control, opposed to what is out of our control. This is what you need to focus on moving forward, what is under your control. Use this “pause” to reevaluate what is most important to you and examine your spending habits.
What just happened in the stock market?
We’re officially in a bear market, as last Thursday’s nearly 10% decline in the S&P 500 Index was one of its worst days in history and the largest one-day percent decline since the 1987 crash. Then, on Friday we saw a record setting gain in the markets of roughly 9.3%! As I type this, markets are showing large losses early Monday morning (3/16). The Fed announced Sunday that they are cutting the Federal Funds rate to zero and adding a Quantitative Easing (QE) package to the picture, all in an effort to buoy the economy and make financial markets attractive. I expect markets will not be swayed until we see good news on the COVID-19 front. Time will tell. We are in the midst of historical times that will most certainly shape how we live for generations to come.
This decline has been more personal than other declines because it is being felt by everyone. Schools are being closed, major events have been cancelled, major league sports seasons have been postponed, travel restrictions have been put in place, many employees are being sent home to work remotely, planes are empty, and many shoppers are staying away from stores and restaurants.
The significant efforts to contain the outbreak are also the same actions that will have an impact on the US economy. Just a few short weeks ago, the economic environment was healthy and improving in the US and around the world. Now, as we head into the second quarter, the presence of an economic slowdown is a reality and the odds of a recession are increasing. That said, in our view markets have largely, if not overly, priced in these recessionary outcomes.
Context is important. Fear, as a core human emotion, is magnified when situations arise unexpectedly and quickly. In other words, it has been the speed and unexpectedness of recent events that has driven the outsized reaction from the markets. In fact, the S&P 500 Index needed only 16 days to go from a new all-time high to a bear market (measured as 20% off the recent highs), an all-time record, topping the previous record of 28 days in 1929. Many investors have never seen jarring moves like this before.
One potential positive from stocks falling into a bear market this quickly is historically they have also tended to stage more powerful rallies off the lows. For the bear markets since World War II that saw 20% or more declines within 270 days, the S&P 500 tended to bottom more quickly and recorded shallower declines. On average, these quicker bears averaged a 26% loss, compared with the average bear market decline of 33%. Given this was the quickest bear market ever, it is reasonable to think a strong reversal might be possible.
The good news is that the US economy was very healthy before this three-week stretch of steep market declines, with employment strong and the unemployment rate near 50-year lows, solid job and wage gains, corporate profits poised to accelerate, and company balance sheets in excellent shape. This bodes well for a faster recovery on the other side. Like someone who gets sick, the healthier you are coming into it, the faster you tend to recover.
The only thing worse than not having a plan is abandoning the one you have. The stock market has already suffered declines similar to those associated with mild recessions. That doesn’t mean stocks can’t go lower. It just means that the opportunity for long-term investors is getting more attractive. While markets continue to face a crisis of uncertainty, we still have unwavering confidence in the long-term fundamentals and prospects for the US economy and corporate America.
Please take proactive measures to stay healthy and contact me if you have any questions or concerns. I can be reached at the office (805) 938-7654.