Market Update: March, 2020
There’s an old joke that a pilot’s job is years of boredom punctuated by brief moments of terror. It’s like that for retirement planners, too!
It’s also been said that making money is easy, but so is losing it if the right discipline is not exercised when it matters most. As we enter our third week of sustained market volatility, it’s vital that we find reason for that discipline, lest some of us relearn some very old lessons.
This latest correction is being fueled by a perfect storm of uncertainty between the election, the coronavirus and the collapsing price of oil.
Here at Arcadia Financial Group we’re keeping vigilant, but we’re far from concerned. Volatility happens and we’re prepared for it. We endeavor for all our plans to provide our average client with years of income, stowed aside in safe money alternatives.
If you’re already cool as a cucumber, and you want to take advantage of the opportunities this correction presents, CLICK HERE to skip to our suggested action items. But for those readers thirsting for a deep dive into what we’re observing and how we’re advising clients right now, we’ve got you covered:
Development here was seemingly positive after Super Tuesday. Bernie Sanders was soundly defeated by a surging Joe Biden and the S&P moved 4% higher the following day. The theory being that markets view Bernie’s socialist leanings as a threat to the status quo.
But there’s still a long way to go before the DNC and it will be interesting to see what changes now based on recent economic developments. It’s exceedingly rare for an incumbent president to not win reelection, but single termers like Ford, Carter and Bush Sr. all suffered in their reelection bids due to a struggling economy.
The news cycle for the past two weeks has been dominated by coverage of COVID-19, the latest viral outbreak to send people scurrying for hand sanitizer. We’ve been here before; since 2000 we’ve had a health scare about as often as the Patriots have hoisted a Lombardi trophy. That is to say, a lot: SARS, Avian flu, Swine flu, MERS, Ebola, Zika, etc.
But this is the first global crisis in the age of social media where both information and panic spread fast. Public and business events are being cancelled, Costco is running out of toilet paper and the US stock market tumbled more than 10% in a single week. Is this the end of days?
Based on the evidence, calamity seems unlikely. People, businesses and communities are wisely taking precautions. New cases in China appear to be slowing. President Trump has signed a bill allocating $8B toward treatment and containment.
Here’s some encouraging news: the vast majority of COVID-19 patients are either asymptomatic or reporting only mild symptoms such as fever, dry cough and fatigue. And COVID-19 doesn’t appear to be harmful to children at all. Less than 1% of COVID-19 infections are affecting children younger than 9 with zero fatalities.
Still, some precaution is prudent. The new coronavirus is more contagious than the flu. And if it spreads too quickly, like it did in Wuhan, medical providers and resources can be stretched beyond capacity. By far, the biggest concern is the skewed mortality rate. COVID-19 is markedly more dangerous in the 60+ demographic, particularly amongst those with poor or compromised health.
This is a developing story, but in summation Saudi Arabia and Russia are now embroiled in a price war over crude oil. Russia refused to go along with OPEC’s proposal to cut production on Friday, so the Kingdom fired back by slashing prices, effectively flooding the market.
Crude futures dropped over 20% Sunday night, the biggest decline since the first Gulf War. This is a big deal as many oil producers, including those in the US, cannot maintain profits at these price levels.
Today, a barrel of oil is literally cheaper than an equivalent volume of hand sanitizer or Monster Energy drink. It’s difficult to imagine this situation perpetuating for long, but strong diplomacy will be required to calm tensions.
And Now a Word on Volatility
It’s so vital we remind ourselves, despite the swiftness and magnitude of this last correction, that markets are, have been and will always be volatile. Drops of 10% or more have happened 37 times since 1980; that’s once a year on average.
COVID-19 and the oil feud are just the latest reasons for a market selloff since the last batch of reasons you’ve probably forgotten:
Despite this volatility the long-term upward trend remains intact. Why? Stocks are fractional shares of ownership in a business. All those businesses in sum make an economy. And the US economy has been on an unstoppable march of progress since WWII.
Last weekend, Warren Buffett was asked if he was changing his portfolio due to coronavirus. His response, “we’re buying businesses to own for 20 or 30 years. We think the 20- and 30-year outlook is not changed by the coronavirus.”
We’d be willing to bet that the Oracle would have similar things to say about oil. Crude prices have been oscillating wildly for twenty years. Markets and economies adjust.
This country’s been through worse. If we can survive the pervasive fear of terrorism after 9/11 and the banking collapse of 2008 it’s a safe bet we’ll overcome a bad flu. The S&P 500 is up over 300% since 9/11. Rejecting pessimism, and embracing progress, has been tremendously lucrative.
But volatility breeds a certain kind of temptation. It may seem reasonable, even obvious, to sell, hide or move to cash until things return to “normal”. The problem is that we have zero evidence that market timing works. If anything, market timing incentivizes bad habits: if you sell when the market is dropping, and look to jump back in after recovery, you’d be on track to sell low and buy high…not a recipe for success.
Getting in and out at the right times is so difficult as to be nearly impossible. Studies have shown that just an average of three days a year generate 95% of all market gains. And most of the market’s best days occur within two weeks of the worst. And if you had missed just 25 of the best days in the market over the last 40 years, you would have been robbed of nearly all the return. Running to cash may feel good, but it’s not a winning strategy. Let’s not forget that when you stay invested, your dividends and interest are reinvesting when the market is low, aiding the inevitable recovery.
Consider that every S&P 500 decline of 15% or more, from 1928 through 2019, has been followed by an average recovery of 55%! Counterintuitive as it may be, staying the course is undefeated when it comes to mastering volatility. It’s been said that it’s not investments that lose money, but people.
Warren Buffett also said that, “the stock market is a device that transfers money from the impatient to the patient.” When we panic sell, a more patient, long-term investor is going to scoop up your shares at a discount. Volatility is not a flaw of markets, it’s the price of admission for long-term success.
But let’s be real. It may get worse before it gets better. And a virus can take months to work its course. If you take note of nothing else let it be this: we’ve planned for this. Our clients are not exclusively in the stock market. The reason we encourage owning cash, bonds and annuities is specifically to give your nest egg the time and diversification it needs to navigate volatile markets. A great sedative is to add up all the months of income you have on hand, it’s likely 12-36 months or more. We’ve got this.
Things to Focus On (What You Control)
Concerning the Virus
The master of horror put it best:
Wash your hands. Stay home if you’re not feeling well. Look out for anyone over 70 or with compromised immune systems. Help them stay healthy and isolated until things are in the clear. Don’t go overboard with precautions; clearing the store shelves of soap isn’t going to keep anyone safe if the rest of the town can’t wash their hands!
We can be good neighbors by letting valuable resources go to the places that need them most. Right now, that’s hospitals and nursing homes.
Keep Your Cool
Turn the news off. You can’t control daily market swings, but you can control how they affect your emotions. It’s a lot easier to stay calm if you distance yourself from all the media doom and gloom.
What makes this correction unique is that it’s happening in an age where your phone is updating you twice a minute. Give yourself distance and room to breathe. Before you know it, we’ll be cycling back toward optimism. Everything must run its course.
Be Greedy When Others Are Fearful
- The Fed just cut interest rates by 0.50%. Now’s a great time to look at refinancing existing debts. If you need someone to talk to contact John Donlon of Goldcoast Mortgage at (978) 922-4446. You can trust him to weigh your options.
- Make your IRA contributions for 2019 before the April 15 deadline. Think about doing your 2020 contributions for Roths, IRAs, 529s, HSAs and the like. It’s a great way to buy low! You may not be capturing the absolute bottom, but years from now your 10-15% discount will look like a steal.
- Similarly, if you’re still working, think about increasing your retirement plan contributions. Keep buying when the market is on sale.
- Execute any planned Roth conversions. You convert more shares when the markets are low which will help you save more on taxes long-term.
Finally, know that the entire Arcadia team is here to help. If you want to review how we’ve helped you prepare for volatility get in touch and we’ll review your plan over the phone or in person.
Better yet, register for next month’s Wine and Wisdom, where we’ll be covering the State of the Markets. It’s a whole lot easier to stay the course when you surround yourself with others keeping their cool. It’s why we’re building this community. JOIN US!
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