Less than a month ago the markets were riding along at all-time highs. Then the COVID-19 virus hit the country’s radar and…well you know the story. Since then, the markets have fallen about 30% in an unprecedented 20 trading days. Pundits are comparing the situation to the financial crisis of 2008 and 2009. While it does feel like a crisis, it’s very different from the one that hit in 2008 and 2009. We think that if you understand the difference, you’ll be better equipped to decide how to ride this one out.
Comparatively speaking, the COVID-19 crisis is more like the terrorist attack on 9/11 than the financial crisis of 2008. Unlike 2008, which was mostly caused by a rogue sector of the financial industry, COVID-19, like 9/11, is an isolated incident caused by forces currently beyond our control. But after 9/11 we got back in the driver’s seat by confronting our adversaries, shoring up our homeland security and supporting vital industries like the banks and airlines. We’re doing similar things to battle COVID-19: limiting social contact for a relatively brief 2 to 3 weeks; fast-tracking virus testing so we can isolate infected individuals in order to protect the most vulnerable; getting hospitals ready to handle the influx of seriously ill patients. A vaccine has already been developed and will soon be in test trials. While the vaccine rollout likely won’t happen this year, it will happen.
Even better news is that the supply chain is in good shape. Toilet paper might be hard to find, but produce, fresh meat, canned goods, frozen food and all the staples we need are still being delivered and stocked at grocery stores. The stores are so inundated they need to hire more employees.
This isn’t my first rodeo. I grew up in the 70’s. The entire decade was basically a recession, with double-digit interest rates, the energy crisis and rapid inflation all occurring during that period. I entered the business around June 30, 1987 when the DJIA was trading at about 2418 and just months before the crash of 1987. I started KWB in 1996 during a period which had its share of unsettled markets. KWB has steered clients through tumultuous markets in 2000, after 9/11, and during the Great Recession of 2008 and 2009. We made it through those periods. We’ll make it through this.
Still, times like these spark natural concerns and questions: Where is the bottom? How much farther will stocks fall? How long will the crisis last? Is a recession priced into stock prices? Does the economic data support recessionary conditions? Are the markets washed out from a technical analysis and sentiment perspective? Has government policy and support been sufficient to get us out of this?
We’ll never pretend to have all the answers. But like the broken record we’ve always been during the downturns, we want to remind you that markets go through up and down cycles and recessions occur naturally. This downturn will take time to recover from. Will it cause a recession? Maybe. Cyclical recessions typically tend to last between 6 and 18 months. Long enough…but not a lifetime. The bottoming process takes time and patience will be required as the process unfolds. This could take weeks or several months.
KWB is in the long-term investment business and has no plans to sell stocks unless you are allocated to the “Guardian model” which will likely reduce stock exposure in April if the situation persists. For long-term investors, the current market conditions could present a unique buying opportunity. These bargain basement prices only come around once in a decade or so. If you’re well-positioned, you might want to take advantage of them. If you’re among those who need income, we’ll likely reduce bond exposure, taking advantage of mostly higher bond prices to meet any current liquidity needs. If you are taking more money than needed, you may consider reducing withdrawals until prices get back to more favorable values.
Predicting the market climate is similar to predicting the marine climate. You can study and subscribe to all the indicators and prediction models, but sometimes gale force storms appear out of nowhere. When that happens, you can jump ship and hope you’re close enough to swim to shore, or batten down the hatches and prepare to ride out the storm. A mariner knows the storm will pass and calmer seas will return. Educated and thoughtful investors know that the markets behave much the same way.
Like all the bear markets we’ve suffered before, this too shall pass. History shows that long-term investors weather the storm better than those who try to time the market. Set your sights toward summer. It will likely take some time to climb out of this trough. But if you look at the efforts our country is making, you can see we’re equipped and ready to meet this challenge.
Hang in there. We’re with you all the way.
Analogy: Can I time the market and/or trade stocks and win?
I liken this idea to the many that flock to casinos for fun but also for a chance to win. Some are frequent visitors and bet big and may be labeled a “professional gambler” while most others are “novices.” In the end it is no surprise that the “house” or casino wins over time. That is why their hotels are fancy, big and include waterfalls and mini-cities. The novices usually walk away with less money than they arrived with, while the “professional” will have good and bad days and some may even eek out a living.
When it comes to investing, long-term investors are the “house or casino.” They will win over time as the odds are greatly in their favor. Just look to Warren Buffet and other successful long-term investors who use volatile times to accumulate more shares and remain steadfast. The novices, or short-term traders who believe they can time events will likely sell too late and re-purchase too high thinking they have some wisdom that others do not.
It may not be as exciting in the short run, or hard to remain calm when a novice or professional is on a winning streak and you’re the house, but I’ll stake my wager on the house as history is quite clear.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of March 17, 2020.
The Wealth Mangers at KWB Wealth are registered representatives with and offer securities and advisory services through LPL Financial, a registered investment advisor. Member FINRA/SPIC. KWB Wealth is a separate entity from LPL Financial.