We’d like to offer you our latest thoughts regarding the ongoing volatility in the markets due to the coronavirus. By the end of February, the Dow Jones Industrial Average was down 14% from its high point just a couple weeks earlier.
The scale and speed of the recent equity losses were stunning. Still, we were not particularly surprised by this, since downturns historically happen in very short spurts.
While we know the drop may raise concerns about your investments, we want you to know that we are keeping a close eye on the markets and will continue to provide guidance as this health crisis continues to develop. The following is a synopsis of our thoughts in three areas:
- The Retirement Shock Absorber® & Stress Testing Your Portfolio
- Thoughts on the Coronavirus & Its Effects on the Economy
- Implications for Investing
The Retirement Shock Absorber®
One thing we cannot stress enough is the importance of having a margin of safety. Our Retirement Shock Absorber® is core to our planning process precisely because of times like these. During the bull market of the last decade we’ve focused on this theme of building and maintaining a Shock Absorber that could withstand substantial volatility and an inevitable market declines.
We have talked extensively over the last year about Recession Preparation, not because we ever believed we could predict the timing of the next downturn, but simply in order to get ahead of it with proactive planning.
We’ve found that one of the most helpful ways to think about your retirement security in light of negative contingencies is to organize potential changes into three categories:
- Total Control – Factors like asset allocation and discretionary expenses which you can adjust
- Some Control – Things like your income tax bill or the amount of assets you have readily available which you cannot completely control, but which provide an opportunity to make some changes
- No Control – These are macroeconomic or political types of changes that can have a big impact but which you have no ability to influence Black Swan Events.
We have stress tested all of our clients’ portfolios and prepared Recession Prep Scorecards in order to be ready for this type of downturn.
There are two sides to our assessment of the economic impact of the coronavirus:
- The spread of the virus appears to be slowing in China and its business activity may be picking up again
- The virus is now spreading across the world as the success of containment efforts remains unclear
Just three weeks ago, China was recording more than 3,000 new cases per day. Since then, the number of new cases have been falling and recently appear to have leveled out to less than 500 per day (according to the World Health Organization).
Of course, this news is being offset by reports of new cases with a particular concentration in South Korea, Italy, Iran, and a number of other countries throughout the world. We also recognize the risk of global spread, but containment in China is encouraging.
In terms of corporate decision-making, organizations do not want to be hindsighted and, as a result, they are making cautious decisions to halt business travel, cancel events, and encourage employees to work from home. These types of decisions could really create a negative ripple effect on corporate earnings, especially as consumer demand suffers.
A significant number of jobs are dependent on travel. Everyone from airport and airline workers to hotel employees to restaurant workers could all suffer as people stay home more and big professional events are cancelled.
However, we still take solace in the fact that overall economic conditions in the U.S. in particular were fairly strong heading into the current environment. We will continue to monitor consumer sentiment and corporate earnings announcements to see what type of effect all of these changes are making to the bottom line.
It is very common in markets like these to hear that it is potentially a great buying opportunity, but the reality for most people is that they cannot act on it because they are already invested. That is why last year we advocated that our clients sell a portion of their equity investments to create “dry powder” while walking the line of still providing growth in the portfolios.
By taking some chips off the table during one of the longest bull markets in history, we were able to create cash to be deployed opportunistically. In fact, we did make some small buys last week and will continue to look for opportunities to do more of that going forward.
Something we mentioned in our communication last week that bears repeating: No one predicted the coronavirus. Just like the majority of events that have triggered previously sell-offs in the market, it is unexpected and not foreseeable. However, what we’ve also learned from history is that this will have a cycle and that it will ultimately end.
The clear takeaway for long term investors is that the trend in stocks has always been favorable if you can remain invested and do not succumb to selling at the wrong time. We do not know how long the coronavirus will last and how widely it will affect the global markets and the economy.
However, we are optimistic in the equity markets over the long term and will continue to look for buying opportunities in the midst of the current volatility and uncertainty. (See this report that shows all the unforeseen past events and how the market has responded.) Remember that we have a plan in place that is built to withstand the kind of volatility we are currently experiencing.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.