US Viewpoint: March 12, 2020 - COVID 19 Update
We wanted to share some updated thoughts with you about the continued sell off in the stock market. We understand that you are probably nervous and that is ok. Bear markets are not the fun part of investing, but things will recover. Here are some bullet points and we'll go into great detail below.
The one, two punch of COVID 19's impact on economic growth and energy markets crashing have pushed the S&P 500 and Dow Jones Industrial Average into a bear market (20%+ sell off from the February 12th highs).
We remain conservatively positioned with between 3% and 5% in cash and money market funds. Our equity portfolios have a significant allocation to low volatility investments which have declined less than the markets.
Expect continued volatility and we expect that stocks will see further declines in the coming weeks as investors try to forecast how economic and corporate earnings will be affected.
Our Strategy
In our December 2018 US Viewpoints we wrote:
"In our last Quarterly Viewpoints, we borrowed a line that we need to prepare because we cannot always predict. We had no idea and were not predicting the results of this quarter, in fact we were positive. We did takes steps in October to limit the downside in your accounts. We added a low volatility exchange-traded fund (ETF) to the accounts invested in our ETF model. This type of investment performed well during declines in the market. We increased your cash holdings slightly as well. For our clients near or in retirement throughout the year we have increased your cash holdings to make sure we had at least 12 months of your distributions sitting safely in money market funds. Our moves this quarter did reduce your losses compared to the benchmark."
Our strategy has not deviated from this point a little over a year ago. We remain conservatively positioned with between 3% and 5% in cash and money market funds. Your cash position will continue to grow as dividend and interest payments hit this month. Our significant allocation to low volatility investments has performed much better than the S&P 500 so far this year. Your bond investments have also performed well during the stock sell off.
The natural question you are asking, is should I get out now? We are not advocating any drastic moves at this time. We expect to see increased volatility in stocks over the weeks and months ahead. We will likely trim some of our holdings. The decision to sell a small percentage of our holdings is not because of a fear of prolonged loss, but to allow ourselves to make a tactical purchase. The best market days usually happen during a bear market but we do think stocks will continue to sell off until we get more certainty on how COVID 19 and the energy decline will impact the economy. Stocks tend to over correct before they stabilize.
Our chances of a recession have increased, but the duration and severity is still hard to forecast. Our stance is an economic recovery is likely to be swift once the COVID 19 virus subsides. We are not trying to time the market and don't recommend you try either because exiting now means you'll need to make two investment decisions right, your sale and purchase back into the market. When we worked with you to identify your portfolio asset allocation, we planned that you would encounter bear markets. Those are included in your historical returns projections and our analysis. It is helpful to revisit the stages of investor emotions in weeks like this. We expect we are somewhere between Fear and Panic, but only time will tell.
How We Got Here
Stocks have declined since the mid-February highs as investors digest the one, two punch of COVID 19 and falling energy prices. The ultimate impact that COVID 19 will have on the US and Global economy is impossible to say at this point. It will have an economic impact on our economy, but the question is how long will it impact the economy.
Energy prices have declined 30% after the Saudis and Russians failed to agree on production cuts at an OPEC meeting. The Saudis increased oil production and lowered prices to begin a price war with Russia. This sell off in oil prices has contributed to the plunge in stocks this week. The energy industry is closely tied with many industrial, manufacturing and chemical companies, which all also saw significant declines. Many energy companies have taken on a lot of debt over the past few years. With the lower energy prices, it weakens their earnings and ability to pay this debt. This has caused a sell off in high yield bonds, which many oil companies have issued in recent years. One positive is gasoline prices have dropped with oil prices.
The speed in which stocks have fallen 20% has been the fastest bear market on record. It took less than 20 trading days for us to drop 20%+. The median for other bear markets has been 156 trading sessions. Since World War 2, the average bear market has seen stocks decline 33% from peak to bottom. A positive is the faster a market sells off, the shorter the bear market tends to be.
Our current situation is unique and has not been caused by a bubble in technology stocks or a housing marking crash. A global pandemic is the definition of a black swan event. Goldman Sachs looked at event-driven bear markets, which are declines not caused by an economic recession but things like wars and oil market shocks. Their research shows that the average fall is 29% and the market recovers within 15 months.
We are here for you with any questions, concerns and things you want to discuss. Please do not hesitate to call or email us. Our phones are not ringing off the hook, despite what many people think! More importantly, we want you to take care of yourself during the coming weeks. We will continue to update you as we digest new information.
We have linked to a Morningstar article takes a rational look at possible economic scenarios.
Morningstar's View: The Impact of Coronavirus on the Economy