As the COVID-19 cases in the US continues to increase and the equity markets continue to decline, now “officially” a Bear market, undeniably you have felt a range of emotions. We continue to be in unprecedented territory infecting most major continents around the world. Historically, the average number of days from market peak to entering a Bear market (-20%), is 256 days. This current market turn occurred in just 21 days. To add perspective, the financial crisis of 2008 took 274 days to reach its trough.1 If you are engaged in any news, there is a lack of optimism or an improved path of direction. This only heightens our emotional state of mind (concerns, worries, fears) and eventually, makes us believe that we must “do” something.
It is human nature that under a deluge of negativity and stress, that we must “do” something. When you are over-weight and tired of the number on the scale, you start eating right and exercising. A very common response to change your circumstances and taking control and action towards a new path makes us feel like we are at least “doing something”. While this applies to many areas of personal improvement, it does not work well in applying this strategy to “going to cash”. While you may find short term relief from the pressure you are feeling (emotions), you have also created a more difficult problem you eventually must answer. “When am I going to feel comfortable investing back into the markets after taking this loss?” We have a few clients that got out of the market and went to cash in 2008. They got instant short-term relief and felt in control because they “did” something. However, a few of these clients are still sitting in cash and missed what arguably was the longest 11-year Bull market. They never answered the challenging question. During this elongated period, the S&P 500 had a nearly 530% cumulative total return.2
The equity market indexes, on average, are more of a proactive than reactive indicator. They look out into the future based upon economics, earning expectations, trade agreements, etc. and price into the current market what is expected in the future. It is not an exact science and is speculating on what may lie ahead. There have been a lot of discussions on the conference calls we participate in of how much of the equity markets declines have already been priced in. While no one knows the answer for certainty, the markets turned from all-time highs in the middle of February to a Bear market (-20%) in 3 weeks. It is worth asking the question, how much of the decline has already happened? Time will tell for certainty. Here is what we do know. Between January 3, 2000 and December 31, 2019, six of the best 10 days occurred within two weeks of the worst 10 days. While the markets continue to capitulate, earlier this month we saw the 5th most significant percentage drop in the S&P 500 – nearly 10%. The very next day, the 10th largest gain of all time occurred: 9.40%. What does this tell us? That participating in the equities markets is important, irrespective of the daily outcomes.3
For perspective, the chart on the following page indicates the growth of $10,000 over the past 20 years ending in 2019 if you missed out on the best market days. While past performance is no guarantee of future results, the data is very compelling.
As you know, we spend a lot of time in our work with you determining the type of investors you are (conservative, moderate, aggressive) and building investment models that meet your expectations, risk tolerances, and take into account who you are individually. We expect volatility both through Bull and Bear market conditions. Therefore, we do not need to react in the short term when these conditions arise as expected. We are proud of you as very few are abandoning their allocations and going to cash. Many of you are wanting to know how to invest more money or increasing your monthly contributions. If you feel compelled to “do” something, these are the actions we would like to see more of you implement. There are great advantages here for those that can take advantage of the declines. The worst thing you can do, is stopping your contributions. As the negative news continues, don’t stress out or become obsessed with worry. Pick up the phone and call us. We feel strongly that at times like these, we differentiate ourselves. Our office is open with all hands on deck to be here for whatever you need. Many times, you only need reassurance and encouragement. We have plenty of both.
We have seen and expect to continue to see, rapid government responses at both the Federal and State levels. State levels in mandating closures (schools, restaurants, gyms, etc.). If the reported cases continue to rise, we expect more of this to come. Federally, there has been decisive actions regarding fiscal and monetary policies (rate reductions, stimulus packages, tax deadline extensions, etc.). Unprecedented times call for immediate responses. Last week, on a Sunday no less, the Fed announced they were dropping rates to 0%. In less than 10 days, they dropped the rates by 1.50%. The right things are in motion.
Lastly, we would like to seek your input. We believe we are all in this together, and together is how we are better equipped to see ourselves through it. We are considering doing weekly conference calls. We can provide similar information and you can hear from us directly. While we would not be able to take questions on these calls, we would request that you email us questions in advance to address on those calls. Looking to gauge interest from our LWA family, if that would have any value. If we get enough interest, we will initiate those calls soon. Please feel free to share these commentaries with anybody you wish. Other advisors may be ducking and dodging their clients and we are working hard to stay at the forefront of this. We are communicated during these uncertain times to provide assurance and keep you informed to prevent you from “doing” the wrong things. Please utilize us if needed. We truly appreciate your business and allowing us to help you pursue your financial goals. Since much of what is happening is outside of our control, other than your own social distancing, we are going to share with you what you CAN control and do next week.
Pursuing Wealth, Wisdom, and Well Being Together,
125 Sourced from Morningstar Direct using S&P 500 TR.
3 Sourced from Morningstar Direct using S&P 500 TR. Bear market defined as a 20% decline in value.
4 Sourced from Morningstar Direct using Lincoln’s Balanced Asset Allocation (50/50), as of 3/6/09.
Chart sourced from Morningstar Direct using S&P 500 TR.