03/12/2020
Finding Perspective Amidst Panic:
[In a rare move, I'm posting a communication going out to my clients and key influencers today. Facts and opinions are everywhere. My hope is that you can ingest a good dose of wisdom too.
Want to skip to the juicy stuff? Scroll down until you find the >>>]
Despite a nice recovery day on Tuesday of this week, 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 (notice the purposeful use of the word) on Wall Street are selling at virtually any price, which is causing the markets to drop.
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.
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. 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.
Further, the current “sellers” in the market may be irrationally “acting now” with the intentions of “thinking later.” Why are they acting so quickly? Fear of the unknown. Short-term uncertainty leads to irrational, short-term actions. Because the Coronavirus is the elephant in the room—make that the only thing in the room because economic fundamentals have been solid across the board excluding the Coronavirus and it’s impact—most likely you can join me in the belief that every week, every day, every hour the world comes to know more about how to prepare for, minimize, and fend off this new health enemy. We don’t know when uncertainty will largely subside, but we are moving toward that inflection point at the rate of 24 hours each day.
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 reading the daily headlines. 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. And the danger is this: selling at the bottom and then missing out on the recovery.
Here’s a quote from Nick Murray that puts the ultimate perspective on our current situation: “I don’t worry about which way the next 20% move in the market will be, because I know exactly which way the next 100% move will be. And I can’t run the risk of missing that move.”
It is normal to feel anxious at times like this. However, if you are feeling particularly gripped by fear these days, may I take a moment during a potentially life-clarifying moment to ask you a rhetorical question? Who or what are you ultimately placing your financial and personal health sustenance and hope in?
Is it possible that you are leaning more heavily than you ever anticipated into the financial wealth you’ve been entrusted with and the remarkable healthcare system in our country in this period in history? Wealth is a tool. And our access to medical care is a rare benefit and true privilege. But my ultimate hope comes from my faith in Jesus Christ as my redeemer and sustainer. Philippians 4:6-7 says “Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus.” Where you place your faith is far and away the ultimate long-term decision.
In addition to protecting your health, want to take some action? Here is an idea to strongly consider: If you have a mortgage, consider looking into a refinance of your existing mortgage balance (to be clear, I’m not advocating a “cash out” refinance or financing a paid off home). Mortgage rates are now the lowest we’ve seen in modern mortgage history.
Some clients have asked if now is a good time to put cash to work. The answer is “yes” as it always has been, but only in the context of your overall financial plan.
Have you eliminated all short-term/consumer debt? Do you have a stocked-up Emergency/Opportunity fund with cash or very conservative investments? Have you prepared for other known significant expenses for the next 1-3 years? If the answer to all these questions is “yes,” then deploying cash via tax-advantaged retirement accounts or regular investment portfolios can be advantageous if you think long-term.
Do NOT seek to put cash to work because you are trying to time the market. DO consider it because “[we] know exactly which way the next 100% move will be. And [we] can’t run the risk of missing that move.”
