March 18, 2020

I am writing this newsletter from my home office because my wife and I are in self-imposed isolation.   We are not sick, but we recognize we are in the vulnerable demographic group.  We are trying to protect ourselves and mitigate the virus circumstances by “social distancing.” 

Typically, a major part of our job is to “remove the emotion” from the conversations about your finances and investing.  Money is emotionally charged.  Likely by now, you’ve heard it from us and many other sources, reacting emotionally to the markets is usually a recipe for disaster.

Well, I’m going to do something a bit different today.  I’m putting emotion into this conversation.  I’m going to tell you how I’m feeling about all of this. Because the truth is, we all have the emotions.  So let’s talk about them, and then I’ll tell you what I’m doing to work through them:

I still have PTSD from the recession and markets from October 2007 through March 2009.  This was the worst time of my professional career and threw me into a temporary depression.  That was the only time that I can remember it being difficult to wake up and go to the office every morning. (In case you didn’t know, I LOVE what I do.) It wore me down. After recovering from the recession and the stock market’s deep declines, I never thought we would have to face anything like that again.

Now, here we are in a “bear” market (a decline of at least 20%), as well as a global pandemic.  I am now planning for the work-optional part of my life, with a little more time off, and a little more golf.  Thus, I have the same fears as any retiree or prospective retiree.  None of us want to see serious or even mild declines in our portfolios.  However, I know from personal experience (50+ years) that we must invest for the long term and not just one, or a few years.

As an advisor it is my nature to shoulder the weight of this market volatility not just for myself, but for all of my (our) clients.  That’s a lot!  This (the stock market & COVID-19) isn’t just a threat to our portfolios but to our personal health as well.  That’s scary! 

I feel all of that – the fear, the anger, the stress, the worry – and I let it sink in…

So what do I do? 

This is how I get past it – I let the logical/rational/left part of my brain work through it this way:

This is not the same as 2007 to 2009.  We will get through this!  How do I know that?  We’ve survived ALL of the downturns that have come before!  100% of them.  In fact, we thrived after they ended!  I’ve prepared for this with my own portfolio, and we’ve structured our clients’ portfolios to survive and thrive!

This reminds me of the time my wife and I were on vacation in Maui, Hawaii.  We drove the “Road to Hana”; little did we know that it is one of the more dangerous roads in the world.  It is a 62-mile winding road with 620 turns, many of them hair pin.  Even though it was scenic, we were nervous and anxious the whole time.  An experience like this feels like it will never end when you are living through it, just like the recession and market declines of 2007 to 2009, and just like today’s Coronavirus and bear market.  Well, the drive did end. We were happy we did it because of the beautiful sights and the memorable experience, but we were relieved to get back to a smooth highway.  Today people will be much happier when the markets return to a “smooth highway”.  And we will return to that, even though we don’t know when!

One of the keys is “not to sell low” because you lock in those losses forever.  Schools are closing, sports are suspended, cities are declaring states of emergency, businesses are starting to work remotely.  The news will get worse and corporate earnings will come under pressure.  None of these gut-wrenching declines ever feels good.  In my 50+ year career I have experienced quite a few.  The best way to achieve long term financial success is to stick to the game plan!  Two years from now when we look back, I truly believe we will be saying that “2020 was the year of the virus, and 2021 was the year of the recovery.” 

I can’t take the emotion away, but please know that I understand because I am feeling it too.   What I can do is listen and guide you.  I hope my story resonates with you.  Please lean on us and call if you have questions.

A client of ours responded to one of our newsletters last week with a very poignant statement: 

Don’t touch your face and don’t touch your IRA!

She says she can’t take credit for it, but it’s certainly worth passing along!

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

A reminder on the current operation of our firm:

We at Kohlhepp Investment Advisors, Ltd. are taking the proper precautions to protect ourselves and our clients, and we continue to focus on the wellbeing of our clients, associates and business partners. This includes the decision to suspend in person meetings and only hold virtual meetings – phone or video conference – for the foreseeable future. If you feel you have a need to physically stop in the office, please call first.

Our office is fully operational and our staff is working remotely. Based on what we know at this time, we do not have concerns about our ability to conduct business as usual. 

March 12, 2020

Despite a nice recovery day on Tuesday, it now appears that the investment markets are in full panic mode, the result of the World Health Organization declaring the Covid-19 virus to be a global pandemic.  Traders on Wall Street are selling at virtually any price, which is causing the markets to drop into bear market territory.

The long bull run that started in March 2009, and set many records along the way, is now officially over.  May it rest in peace; we will all remember it fondly.

It is almost impossible to keep a rational perspective in the middle of a herd that is stampeding toward the exits, and this particular stampede can fairly be described as one of the worst in market history.  Michael Batnick, director of research at NYC investment manager Ritholtz Wealth Management noted, this is the fastest bear market ever; that is, the fastest that the U.S. stock market has experienced a decline of 20% or more going back to 1915.  The average number of days from peak to a 20% decline is 255, and the median is 156.  The recent market selloff reached this dubious achievement in just 17 trading sessions.  By contrast, the fabled 1929 market downturn took 36 sessions.

The Covid-19 pandemic (as it is now known) should first be considered a health issue, and everybody should do what they can to protect themselves and their families from the spread of the disease.  It should go without saying that your health is more important than your portfolio.

Is your health at risk?  The World Health Organization has published information which suggests that the Covid-19 virus in China was more deadly, on a percentage basis, than the Spanish flu epidemic that raged across the world in 1918-1920.  So far, it has been more deadly than cholera, much more than swine flu or hepatitis A.  On the other hand, reports indicate that the elderly and people with pre-existing health issues are far more likely to die of the corona virus than younger and healthier people, and the death rate outside of China has been roughly half of the Chinese experience.  More testing will be needed before we know the full extent of the infected population and the morbid statistics for those who ARE infected.

But once health precautions are taken, it is appropriate to address the potential for losses, and how best to navigate the market conditions.  There are news reports that the U.S. government will propose a payroll tax cut, and possibly also bailouts of key publicly-traded companies in the travel and entertainment industry.  The Federal Reserve Board has cut a key interest rate by half a percent—a dramatic move that seems not to have had more than a one-day impact on market sentiment.

Historically, bear markets have been less impactful than their bull market counterparts, as you can see from the accompanying chart click here.  Of course, you could argue that a global pandemic is different from a housing market crash.  Research analysts at Goldman Sachs took a look back at “event-driven” bear markets; that is, market declines that were not driven by an economic recession, but instead were triggered by things like war, oil price shocks or an emerging-market crisis.  They found that the average event-driven bear market resulted in a 29% decline—on average.  The report notes that we have never before entered a bear market due to a viral outbreak, but in the past, bear markets triggered by “exogenous shocks” have recovered their previous levels within 15 months.

There is some good news for many investment portfolios: during the downturn, 20-year Treasury bonds have gained 24% in value, as bond yields have fallen to record lows.  The 10-year Treasury yield experienced its biggest weekly drop since December 2008.  This performance, so directly counter to stock movements, explains why it is so necessary to hold diverse investments in a portfolio.

The harder conversation is about market timing.  Most people understand that it is impossible to time the market without a working crystal ball.  But this is easily forgotten when the daily headlines announce that your net worth is falling by 4-7% in a single day, when the stock portion of your portfolio has fallen by 20% in record time.  The natural question is: should I get out now and avoid more of the same?

There is only one rational answer to this question: it has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish.  The best strategy has, in the past, been to ride out the downturn and experience the subsequent upturn—which may come tomorrow, next week, next month or next year. 

Make no mistake: bear markets like the one we have just entered pose a real danger to your future financial health.  There is a real danger in selling at the bottom and then missing out on the recovery.

We at Kohlhepp Investment Advisors, Ltd. are taking the proper precautions to protect ourselves and our clients, and we continue to focus on the wellbeing of our clients, associates and business partners.  This includes the decision to suspend in person meetings and only hold virtual meetings – phone or video conference – for the foreseeable future.  If you have a need to physically stop in the office, please call first.

We are here, the office is open – fully operational and fully staffed.  If the situation escalates, we have the capability to be fully remote and are prepared to do so with no interruption to our operations.   Based on what we know at this time, we do not have concerns about our ability to conduct business as usual. 

Be smart. Be safe.  We will be in touch.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Sources:

https://theirrelevantinvestor.com/2020/03/09/the-fastest-bear-market-ever/

https://finance.yahoo.com/news/coronavirus-and-trump-are-causing-stock-market-panic-and-investors-are-powerless-195953674.html

https://www.bloomberg.com/news/articles/2020-03-11/coronavirus-a-pandemic-who-says-in-urging-governments-to-act?

https://www.marketwatch.com/story/goldman-sachs-analyzed-bear-markets-back-to-1835-and-heres-the-bad-news-and-the-good-about-the-current-slump-2020-03-11?siteid=yhoof2&yptr=yahoo

https://www.marketwatch.com/story/boring-bonds-turning-into-best-investment-of-the-year-as-treasurys-see-returns-north-of-20-2020-03-06?siteid=bigcharts&dist=bigcharts

https://www.bloomberg.com/news/articles/2020-03-11/virus-is-at-bear-stearns-moment-and-may-get-worse-summers-says

Source: First Trust Advisors L.P., Bloomberg. Returns from 1926 - 2019

March 10, 2020

One of our strategic partners, Blue Bell Private Wealth Management, with whom many of our clients are invested, sent out this newsletter yesterday. The perspective and sentiment of Kohlhepp Investment Advisors, Ltd. is aligned with what is stated here, so we are partnering with them to deliver this message to you:

Stocks dropped roughly 7% not long after the market opened yesterday. That triggered the first of three circuit breakers designed to give market participants a chance to regroup during moments of extreme volatility.

It is no secret that news of the coronavirus has created mass uncertainty through the stock market, most of which is surrounding the economic slowdown as a result of the virus. If you watch the news regularly, it may seem like this is the end of times. We are here to remind you of a few things about long-term investing.

1. Your financial, investment and retirement plan is probably not going to change

Disturbing or disrupting your long-term plan or radically changing your portfolio makes no sense. Selling today would mean locking in permanent losses. If you did, you would be transferring the proceeds to an asset class (i.e. a money market) that yields close to zero.

2. Nobody called this

Plenty of people had been calling for a recession this year but they are the same people who have been calling for a recession every year. A perfectly correct economic or market call, that cannot be repeated in the future, is worth just as much as no call at all.

3. All in or all out are terrible strategies

Investors cannot afford to miss the 25 best days in the market, or your returns are wiped out. The catch is that the 25 best days are frequently mixed in among the 25 worst days. Unfortunately, you can’t have the ups without the downs and anyone who promises you otherwise is not telling the truth. It is impossible to "time" the markets.

4. Why don't we just sell everything and wait this out?

Eleven years ago today, in March of 2009, the stock market reached its nadir during the financial crisis and stopped going down. If you had polled people that day, most would not have agreed that we had seen the bottom. The economic headlines were not improving. Within 3 months, the stock market had climbed 41% from that March low. Even with the market increase, many investors still were not sure that we had seen the last of the decline. There were still people years later that had gone to cash and still hadn’t gotten back into equities. They missed out on a tremendous rise in the stock market and the commensurate increase in their portfolio.

5. Reducing risk should be part of your plan

Having an effective hedging strategy can help reduce the effects of volatility over the long-term. We believe it is important to protect against the downside without giving up too much upside. This has been and will continue to be a part of our investment strategy.

Conclusion

The worst thing that you can do now is panic. Financial decisions based on emotions have proven time and again to be detrimental to investors. Investing for the long-term will benefit those who are patient, disciplined, and have a plan. The best way to achieve the goals we've talked about together is to stay the course.

We remain vigilant in reviewing your portfolios and we are committed to your goals.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Source: Blue Bell Private Wealth Management

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives. 

March 2, 2020

The COVID-19 virus has been reported in the national press as either a political or an economic story, but it is neither.  It has been compared to the 1917-18 Spanish Flu that infected an estimated one-third of the human population and killed an estimated 50 million people, even though we are now in a very different medical world, even though the Spanish Flu occurred during a major, brutal world war. 

As citizens, investors and (so far) healthy individuals, what do we need to know about this new pandemic?

COVID-19 (formally SARS-CoV-2) is a respiratory virus, caused by a new type of coronavirus (in the same family as the virus that causes the common cold) that was first detected in Wuhan City, Hubei Province, China, and has now been detected in 57 locations nationally, including fewer than 100 in the United States.  One of its primary features is how contagious it is; the virus can live for hours in a dormant state on surfaces (like a doorknob) after an infected person touches them.  It is spread through the air in microscopic droplets when people breath, cough or sneeze.  The Center for Disease Control recommends that people who have the virus wear a mask to protect others, but have said that wearing a normal facial mask doesn’t prevent people from getting the disease.

In most cases, the symptoms of the disease appear within five days, but there have been reported cases of a 14 day incubation period.  Because people can be contagious for up to two weeks before they show symptoms, the virus is very hard to quarantine.  This became more evident when it was discovered that a dog had been infected, meaning that it’s possible for animals to transmit the disease back and forth with humans.  The International Journal of Infectious Diseases, studying the COVID-19 cases from the Diamond Princess cruise ship that reported 355 passengers who contracted the virus, calculated that each person who is infected with the disease, on average, will infect 2.28 others.

As of Friday, there were 83,774 reported cases worldwide, and 2,867 fatalities.  The World Health Organization officials have recently increased the risk assessment to the highest (“very high”) level of risk assessment in terms of spread and impact. 

Reported illnesses have ranged from mild to severe.  Researchers from China’s Center for Disease Control have recently released the clinical findings of more than 72,000 cases reported in mainland China.  The overall death rate is 2.3%, but different populations are far more likely to suffer fatalities than others.  An alarming 14.8% of patients 80 and older died from the disease, and 8.0% of patients aged 70-79.  At the other end, 81% of the cases in the study were classified as mild, meaning they did not result in pneumonia or resulted in only mild pneumonia. 

Fatality rates for children 0-9 years old so far is zero, and the rates are not high for people in younger age ranges: 10-39 years old (0.2%), 40-49 (0.4%), 50-59 (1.3%) and 60-69 (3.6%).

There may be a vaccine on the way, though it is uncertain how soon.  China’s Clover Biopharmaceuticals is partnering with GlaxoSmithKline on a protein-based coronavirus vaccine candidate called COVID-19 S-Trimer.  The University of Queensland in Australia announced a vaccine candidate, and globally, at least 10 other vaccine initiatives are under way.  Treatments for people who have already contracted the disease are as yet unproven.  An antiviral drug called remdesivir, manufactured by Gilead Sciences, is being tested on 700 sick patients in Wuhan.  A drug called Kaletra, produced by AbbVie to treat HIV, is also being tested.

From an economic standpoint, any industry where people gather together in large numbers is being impacted.  That means airlines and the travel/tourism industry generally, plus conferences.

The other impact is related to supply chains.  China’s quarantine efforts have reduced manufacturing in the country where many global companies have outsourced their manufacturing and assembly activities.  Hong Kong is already in a recession, and The Boeing Center at Washington University in St. Louis has estimated a $300 billion impact on the world’s supply chain that could last up to two years.  Lower demand from Chinese buyers has caused a decline in oil prices.

Prevention efforts and quarantine efforts are certain contribute to the economic slow down.  Japan’s Prime Minister Shinzo Abe has ordered all schools closed in Japan for the next month, and officials there are concerned about the possibility that the 2020 Summer Olympics could be curtailed or cancelled.  South Korea has shut down numerous educational institutes including elementary schools in Seoul.  In Italy, the Lombardy and Veneto regions (total population: 50,000) have been locked down in quarantine procedure following an outbreak in the town of Codogno.  U.S. technology companies have expressed worries about disruption to their production in facilities in China, and a February 27 Goldman Sachs forecast suggested that American companies will experience zero earnings growth (Note: this does NOT mean zero earnings) in 2020.

The most important thing to know about the new pandemic is that we actually don’t know what the impact will be—on our health, on our nation’s economic health, on our portfolios.  We do know that the U.S. securities markets are down 11-12% from their recent highs, based on what can only be described as panic selling by the traders who make up most of the volume on the exchanges.  That means stocks are cheaper to buy now than they have been, and dividends are higher, as a percentage of share price, but whether that panic will continue, or not, we simply cannot say.

Please understand that we are monitoring the situation, with an understanding that, historically, trying to time the market or make bets based on guesses about the future has been a losing strategy.  Our most important wish is that you and your family stay healthy.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources:

http://www.cidrap.umn.edu/news-perspective/2020/02/study-72000-covid-19-patients-finds-23-death-rate

https://www.cdc.gov/coronavirus/2019-ncov/about/share-facts.html

https://www.cdc.gov/coronavirus/2019-nCoV/summary.html

https://www.forbes.com/sites/leahrosenbaum/2020/02/20/when-will-there-be-a-vaccine-for-the-new-coronavirus-everything-you-need-to-know/#4cf628fc5025

https://hub.jhu.edu/2020/02/27/trump-johns-hopkins-study-pandemic-coronaviruscovid-19-649-em0-art1-dtd-health/

https://www.health.harvard.edu/blog/as-coronavirus-spreads-many-questions-and-some-answers-2020022719004#q2

https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

February 28, 2020

Wuhan, a city in China with a population of more than 11 million people, was not known to most Americans before several weeks ago.  Now we know that it is the epi center of the outbreak of the Coronavirus.  Initially, it was thought that the virus could be confined to China.  But since then the outbreak has spread globally to many countries including Japan, Italy, South Korea, Iran, and the U.S.  Some cities and countries are restricting travel and preparing for the shutdown of schools and businesses for long periods.  It has becomes apparent that this virus will impact mostly China’s production and GDP, but also other countries as well.

Some experts predict that the number of infections will peak in the next several months and dissipate by summer as the weather warms up.  However, no one really knows.  And the CDC indicates that it could take 12 to 18 months to test and produce an efficacious vaccine.

We urge you to monitor reliable information sources such as the CDC and the World Health Organization for the latest updates.

Economic activity is being affected and fear has crept into the markets.  This has turned to panic in the last 5 to 6 days with the major averages dropping about 11%.  This, in and of itself, is not unusual.  In most years, even when the market is positive, there is an average intra year pullback of 12 to 14%.

SO WHAT SHOULD YOU DO?

• Do not watch the news shows all day long.  They concentrate on the headline stories which cause the most consternation.

• Be aware that your portfolios are structured to withstand declines such as these – remember our “Bucket Strategy”.

• Do not bail on the markets.  Remember, our plans and portfolios are built for the long term, not just 3 months, or even one year.

• Allow us to do the worrying for you!

WHAT ELSE?

• We are now in “correction” territory – a decline of more than 10%.  Corrections are normal every several years.

• Focus on the market fundamentals, which we believe remain positive.

• Volatility is likely to continue for a while.

• The Coronavirus will have a short-term effect on the economy and corporate earnings, some industries more than others, e.g., airlines.

• Financial success is achieved by focusing on long term goals and not letting short term disruptions derail us from our objectives.

• We have great medical care in the U.S.

We are here for you.  If you are in a fearful state, call us.  We don’t believe you need to change anything in your portfolio.

We are confident in the future of the equity markets and our country!

Spring will be here soon!  I am sure we will all welcome it.

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Quote: “In investing, what is comfortable is rarely profitable.”  Robert Arnott