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 percentâ€”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 â€śevent-drivenâ€ť 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% declineâ€”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 â€śexogenous shocksâ€ť 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 upturnâ€”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 â€“ phone or video conference â€“ 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 â€“ 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.
Edward J. Kohlhepp, Jr., CFPÂ®, MBA
Edward J. Kohlhepp, CFPÂ®, 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.
Source: First Trust Advisors L.P., Bloomberg. Returns from 1926 - 2019