Market Update – Now What?
March 23, 2020
There has been tragic loss of lives from Covid-19 and likely will be more before it’s over. I hope everyone takes seriously the social responsibility of following CDC guidelines to help limit the spread of the virus. Just as we take precautions to guard against the virus physically, we also take precautions against letting fear damage our mental health and financial well-being. I recently listened again to the Market Talk interview that Madison Avenue’s affiliated advisory firm, AE Wealth Management had with renowned Wharton School of Business professor Dr. Jeremy Siegel. He opened with a statement that put the current market in historic perspective, “Since 1887 there have only been 140 five percent plus day moves. Now we’re seeing 10% (per day) moves and there’s only been a dozen or so 10% (per day) moves and we’ve already gotten several of them… No one knows how long this is going to last… but at today’s levels we are selling at 15 times last year’s earnings so even if earnings get wiped out this year… we got next year. We clear the virus out which would not be a real robust economy and are selling at historic levels that are extremely cheap in a 0 to 1% interest rate economy. So again, if you can see the light at the end of the tunnel, and also is there a light at the end of the tunnel… I read that Starbucks is reopening 90% of its outlets in China, where this all began about three months ago. So, think about that … light at the end of the tunnel.” Additionally Apple announced on March 13th that all 42 of its stores in China re-opened.
This is not a time to be investing without a plan or a strategy
Per my most recent Market Update, ‘Fire Drill or Real Thing 2?’ “if the S&P 500 should break below 2500 before quarterly earnings which starts in a few weeks, then I believe that is a signal that this sell-off is a whole new bear market with more downside ahead and would seek to reduce risk considerably and implement portfolio hedging much stronger in anticipation of dropping to the next support level on the charts.” Once this level broke down, I made corresponding defensive changes to non-annuity portfolios. So, for now we hold the cash and defensive positions and let the panic to settle. My life was changed for the better because of the crash of 1987. Back then I was a novice with little money for my own account. Now with 30 years’ experience and many clients, I believe this recent crash is offering a chance to significantly improve the financial picture of many.
Here are steps for weathering the recent onslaught of market swings during the Coronavirus pandemic and the upcoming US general election right around the corner (everyone has their own specific situation, and these ideas may not be appropriate for all investors), but offer perspective:
- Remember the path not the first paver – too often people forget the path of their retirement plan and focus instead on the first paver stone of the path.
- Ignore the crowd – Emotions are THE biggest obstacle I know to investors. In fact, involving emotions with investing is like mixing alcohol with driving – a terrible mix. By the time the media is reporting a trend it’s likely already “baked” into the markets and exacerbates the listener’s emotions.
- Use fear to your advantage – Target the investments you want to own and buy them on weakness. Although past performance does not guarantee future results, often when the markets experience a significant sell off (the baby out with the bath water) high quality investments drop right along with low quality investment panic.
- Know your strategy – I believe if you know what you own and why you own it, you can effectively manage any investment in your portfolio regardless of the market. When looking at a company did the drop in the market prices change the quality of the product/service, did it decrease its position vs. their competitors, did it change their balance sheet, did it change the marketplace for their product/service? A while back I saw a suit in a store that I really wanted, but it seemed too pricey. I knew there was a going to be a President’s Day sale in a few months, so I planned to wait until then. In the meantime, the company surprisingly announced store closings. One had my suit marked down 65% for their closing-out sale weeks before President’s Day. I examined the suit; it was exactly as I wanted, only 65% cheaper. Did the suit change? No, but the situation around it did and I took advantage of it. Maybe that suit would’ve been marked down further if I waited but it may have been bought by someone else too.
The peak spread of the virus in the US will hopefully be over soon, but the recovery may take months, even several quarters or longer. Having some cash and defensive investments during volatility can help smooth out the ride and offer potential for long-term joy by seizing upon short term panics in the markets. Not just because of this pandemic, but because there can, and always will be, some sort of event that can spook the markets.
Lastly a quote by Dr. Sigel from his recent call, “If they (equities) didn’t put you through periods like this, then everyone would own them all the time and you’d never get the returns you get… that’s what we call the equity premium. The fact that it gives you returns that are astronomically better than cash over time and even better than bonds over time is because it puts you through times like this and you’ve got to say I want to hold, I’ve got to hold during periods like this. A lot of people can’t and as a result they sell at the bottom and only the brave are left holding at the bottom and they reap all of the benefits.” Just look back at recent history as some examples of this: October 1987, August 1998, November 2008, March 2009, August 2011, August 2015, January 2016, & December 2018.
As always please call us with any questions or to discuss your situation and know we’ll continue to follow the data to guide everyone through these historic markets as prudence and experience govern our decision making.
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The S&P 500 Index is a widely recognized index including a representative sample of 500 leading companies in leading sectors of the U.S. economy. The Nasdaq 100 Index is made up of the 100 largest non-financial companies traded on the Nasdaq stock exchange. These indexes are unmanaged. Investors cannot invest directly into indexes. Past performance does not guarantee future results.