"The four most dangerous words in investing are: 'this time it's different.'" -- Sir John Templeton
"The investor's chief problem -- even his worst enemy -- is likely to be himself." -- Benjamin Graham
“I will tell you how to become rich. Close the doors, be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett
Just over two weeks ago, on February 19th, the market hit an all-time high. Now, after multiple days of 500-1000 point swings on the Dow, markets are now generally 10-12% lower. This means that the US stock market is officially in correction territory, having dropped more than 10% from its recent peak.
The outbreak of the Coronavirus has caused massive, fear-based selling in markets around the globe. The flight to quality has also caused interest rates to plunge and bond prices to surge. On Tuesday, March 3rd, the G7 issued a statement saying that they would take whatever steps necessary to support the global economy. Later that morning, the Federal Reserve Bank delivered on that promise by cutting interest rates 50 basis points. Some people are expecting even more accommodation from the Fed when they meet in mid-March. Subsequently, the 10 Year Treasury yields have reached multiple, all-time lows and are now trading below 1% on Friday, an unthinkable level just a few weeks ago.
To put things in context, the last five months in the stock market have basically been a round trip. During this time period, the S&P started and ended near the 2900 level. What I find interesting is that five months ago very few clients were nervous about their investment accounts or the economy in general. If the markets had been flat over the last five months, nobody would be concerned or asking questions. However, the recent extraordinary levels of volatility and uncertainty about the impact of the viral outbreak are causing concern.
While reported cases of the Coronavirus have peaked and started to decline in mainland China, the additional fears are largely driven by new cases being reported in South Korea, Italy, Iran, and now, the United States. The President has put VP Mike Pence in charge of a massive operation managing the risk and deploying resources of the federal government for the benefit of the US population. We believe that more cases will be diagnosed in the US as widespread testing continues to expand.
There are many things that we do not know from a human or an economic standpoint at this time. We certainly do not want to minimize the human health risks, however, we are not physicians or healthcare experts. You hired the team at Impel Wealth Management and the Horizon Advisor Network to help you preserve and grow your valuable and hard earned financial resources. We believe that there will be a negative impact to economic growth and corporate earnings for at least the next one to two quarters. If history holds true, this will be followed by a rather sharp rebound in activity as vaccines and treatments for the Coronavirus become available and the its impact dissipates.
We know that this is the eighth major viral outbreak in the last 20 years globally. You can see from the attached chart provided by the Centers for Disease Control and Prevention and MSCI how the global stock markets have fared over this time period through these outbreaks.
We also know that since November 1974 there have been 22 previous stock market corrections, and only four of them ultimately became bear markets in which the stock market drop more than 20%.
It is interesting to note that during the SARS epidemic in 2003 the S&P 500 fell by 12.8%. During the Zika outbreak in late 2015 and early 2016 the market fell 12.9%. Since the market peak, a couple of weeks ago, the US stock market has bottomed, so far, at -12.8% as measured by the S&P 500. Recently, the VIX, the fear/volatility gauge of the market, has skyrocketed to levels not seen since the Zika outbreak. However, it is important to note, that even with the recent downturn, the US stock market is up more than 50% in the last five years since that outbreak.
Over the course of the last two years, we have been very intentional and proactive, selling when markets have hit near term, all-time highs. This has allowed us to create the cash our clients need to fund their retirement income goals, systematic withdrawals and required minimum distributions. Over the course of the last year, we have had discussions with many of you and have created enough liquidity within your portfolios to cover anywhere from 1-3 years worth of expected expenses and cash flow needs, depending on your personal situation and risk profile.
We also know that times of great volatility and dislocation also lead to opportunities. This is why we intend to undertake a rebalancing of our clients retirement portfolios back to their target risk profiles. This will allow us to sell bonds, which are at all-time highs, and buy stocks, which have fallen precipitously and are at much lower valuations today than they were just a few weeks ago. We all know that you make money by buying low and selling high. Our objective is to help our clients meet their long-term financial goals and objectives. Any cash and short-term bonds that were created for short term liquidity needs will be maintained.
As you can see from the quotes above, and the wisdom of great investors, it is sometimes hard to do the right thing when people are panicking, running for the doors and the media is screaming that the sky is falling and the world is coming to an end...once again. We are confident that this virus, just like the many that have preceded it over the last 20 years, will eventually be brought under control and that economic activity will re-accelerate.
Americans are an unusual bunch. We love to buy everything we can on sale. Often times we do not have, or even need a reason. However, usually this behavior does not extend to the purchase of financial assets. We trust that this intentional rebalancing of your accounts gives you the opportunity to feel good, knowing that you accumulated more shares of assets you were very happy to own just a few days before, at a much lower price.
The team at Impel Wealth Management stands ready to answer your questions and help you, our friends and clients, continue to meet your financial and retirement goals. We wanted to share this strategy and thought process with you so that you would understand what we were doing and why we were doing it, before you received your trade confirmation statements. We want you to use wisdom and common sense in your personal activities and travel, but, it would likely be wise for you to not pay too much attention to the panicking pundits on cable news or social media. While we are waiting to make progress on this viral outbreak, we do not want you to fall victim to an emotional "infodemic." Please do not hesitate to let us know if there is anything we can do to help you further.
© 2020 Jesse Hurst
*The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. *