Tuesday, March 10, 2020

Why We Are Not Panicking

Stock market declines and corrections, like the one we are enduring now, are always frightening for investors. Yesterday, markets logged steep losses, even triggering a pause in market trading as indexes surpassed the 7% threshold. This followed a string of volatility which has seen the S&P 500 drop roughly 20% since the market closed at an all-time high on February 19. While the Coronavirus had been the recent culprit for stock market weakness, the market action yesterday was exacerbated by the price war on oil between Saudi Arabia and Russia. Crude oil dropped almost 25%, while many energy stocks were down 20% or more in one trading session.

This particular event may be resonating with us a bit more than the typical stock market correction because the Coronavirus outbreak is affecting more than our financial assets and investments. We have spoken with lots of individuals whose personal lives and business dealings have been affected in some way by travel restrictions or the threat of the virus.

We believe the recent Coronavirus outbreak is likely to be a short-term disruption to the economic prosperity we have experienced since the aftermath of the financial crisis in 2008. Incidentally, the market bottomed on March 9, 2009, and was 40% higher within a few months. We have no way of knowing yet whether March 9, 2020, will mark the bottom for this particular correction. Still, there is precedent for the market being significantly higher following a sharp correct just months later.

Through February, the economy has been doing quite well as the jobs market remained quite strong. But, then the Coronavirus interfered with many supply chains and customers in China. It has turned into an event that potentially will have a negative economic impact for at least several months.

However, our base case is that these economic disruptions will probably be temporary in nature. Markets will likely recover in the months ahead as societies all over the world work through this new threat and how to properly contain the spread and develop treatments.

We do not yet know for certain how this outbreak will play out, either in human or economic terms. But in the aftermath of previous epidemics like Ebola and SARS, the markets have been higher 6 and 12 months after the outbreak started without exception.

In addition, the Fed has already reduced interest rates, with more reductions likely to come. Mortgage rates have dropped significantly, encouraging borrowing and refinancing that is likely to save consumers thousands of dollars in annual interest costs for the duration of these mortgages. Fiscal stimulus in the form of tax cuts and other support are also being considered.

While we acknowledge some uncertainty with this situation, what we do know is that staying invested for the long haul has been wildly successful. Unfortunately, we are required to endure volatility to enjoy the fruits of staying invested. In fact, cashing out of investments and missing impactful rebounds can cost your portfolios severely.

We would recommend doing the following:

  • Stay disciplined and remain invested. Often the best stock market days occur during heightened volatility. Missing the best days can significantly reduce your long-term returns. Going back to 1930, if you missed the best ten days in each decade, your performance would have been reduced to 91% instead of nearly 15,000% return.
  • Consider making contributions now. Consider front-loading your annual 401k contributions with stocks selling at a 20% discount compared to a few weeks ago. This suggestion also applies to those yet-to-be-made IRA and Roth contributions. Be mindful of how this might affect your matching contributions. Or possibly keep this in mind should prices fall a bit further.
  • Review your financial plan. We prepare and update plans for our clients daily. As mentioned, we think investments are likely to rebound in the months ahead. Updating your plans and reviewing your overall financial objectives are often a great way to evaluate your sustainable patch, despite the recent stock market correction.
  • Rebalance your investments. We view the current situation as a potential opportunity to add to your equity positions. At Rollins Financial, we review your investments regularly and often rebalance each quarter, but sometimes, we do assess all situations more often than quarterly.
We invite you to discuss your portfolio, your financial plan, or thoughts specific to your situation with us. We continue to monitor all of the client investment accounts and the forward-looking investment strategies we are recommending.


Unknown said...

This is a helpful and timely analysis. Thanks for the information.

Unknown said...

Rollins, I think you are displaying normalcy bias when comparing COVID19 to Ebola and SARS.

DEFINITION: Normalcy bias, or normality bias, is a tendency for people to believe that things will always function the way they normally have functioned and therefore to underestimate both the likelihood of a disaster and its possible effects. This may result in situations where people fail to adequately prepare themselves for disasters, and on a larger scale, the failure of governments to include the populace in its disaster preparations. About 70% of people reportedly display normalcy bias during a disaster.

I think that COVID has the potential to change how the world works forever. Anyways, I'm buying puts.