After the Dow Jones Index hit an all-time high on February 14, 2020, the market has had one of its worst single week losses since 2008*. Once news broke that the Corona virus that began in China, had now reached other countries, the market has rapidly declined this week. Fueled by the sensationalism of news outlets and the opinions on Twitter, Facebook, and Instagram (not based upon economic datapoints or fundamentals) the frenzy that has spurred the fears over the Corona virus has pushed many of the indexes downward. It is times like these, when your own uncertainties and emotions regarding your wealth, may begin to override sound logic and the fundamentals of building portfolios and allocations that were well established prior to these declines. As we have shared, we build these strategies in anticipation of market volatility and corrections, and not in reactions to them.
We rarely have been successful trying to forecast or speculate on what may happen going forward. We do know, that when uncertainties arise, it is critically important to increase our communication with you to share information that we hope will be helpful. When market “corrections” occur, we are diligently gathering data, reviewing information, and talking to analysts and economists that we follow and trust, to determine the best course of action for you. At the same time, it is critically important to us, that we maintain our investment discipline, patience, and gathering the facts as best we can, to provide assurance to you and your wealth. With that in mind, here is a recap of information that we wanted to share with you:
- Many investors determine the “health” of the markets based upon short term perspective. The last “correction” we had was in the 4th quarter of 2018. The Dow Jones Index, made up of 30 stocks, was down -11.8%*. Corrections of -10% or more occur every 357 days in the markets on average**. Post the 4th quarter of 2018, the market had a “V” recovery and ended up in strong positive territory for 2019 as one of the best single gain years historically.
- When the media has been reporting “the market” is down -11% to -12% this week, they typically are referring to either the Dow Jones Index or the S & P 500. None of you, have 100% of your invested dollars in these single indexes. Therefore, it is not a good assumption, that your portfolios are down with those numbers. We spend time understanding your performance expectations and your tolerances for risk to build allocations and diversification strategies. I spoke to one of our clients this morning that attributed his losses to the indexes. Upon reviewing his Moderate allocation, he was only down –4.05% since January 1st and still showing positive results for his one-year trailing performance.
Another big compounding effect to the declines this week have been “robo” investments or advisors. These methods are traded on algorithms and not necessarily fundamentals. With the advancement of technology, there are many applications, Facebook and Google being two of them, that purely operate on proprietary mathematical formulas and algorithms. Therefore, much of the sell off this week has been done by computers and not individual money managers. While I have no idea how these formulas are derived, I am doubtful that they take into consider a virus that started in China.
- Going into 2020, GDP (gross domestic product and an economic indicator regarding the health of the US economy) was increasing, estimated over 2%, and was expected slightly higher from the 4th quarter of 2019**. While Apple reported this week that there may be a slowdown in their earnings estimates, primarily by them doing manufacturing in China, the demand for their products does not seem to be changing at this point. Economics states that when demand is constant and supply or manufacturing declines, it allows you to increase the prices for your products thus increasing earnings. Will that happen? Too early to tell.
- While there is no vaccine for Corona at this point, one thing we are great at manufacturing in the US is intellectual property. There are more than likely multiple pharmaceutical companies working on vaccines and getting them approved by the FDA. There will be a lot of profits for the first one to get it to the market if this virus continues. A World Health Organization delegation that recently returned from China claims that the Corona virus there has peaked***.
- Market “hypes” are temporary, not permanent. Three months ago, and throughout 2019, the largest financial market headlines were about our trade agreement with China. China has now agreed to continue buying US products and we have agreed to lower our tariffs. Today, it is the Corona virus. Despite the speed of getting the vaccine to market, warmer weather slows viruses. Therefore, the headlines surrounding the Corona virus may be moving on to something else in 90 days. While Corona may be behind us then, we have a suspicion the next “hype” could be the pending election in November.
- Most importantly, this is a prime opportunity for buying. We have had more calls this week, for contributions than withdrawals. Recall that during the “accumulation” phase of investing, what you are trying to accumulate is shares not dollars. When you are contributing every month which many of you are, you are buying more shares for the same amount of money than you were the month before. Stay focused when you open your February statements on the number of shares you purchased and not the values in and of themselves.
Our position this week, has been to maintain your financial plan and stay the course. While we believe much of the losses may have already taken place this week, and a -10% being healthy for the markets in general as shared above, we believe there may be more decline to come. At this point, our thoughts are the market will recover with a “V”, bounce off the bottom and head back into positive territory versus a “U” which is a much slower recovery. In addition, on average the losses occur steeper and faster on the decline than they do on the advances. There is also speculation, that when the Fed meets in April if this continues, The Fed is expected to decrease interest rates possibly three times before the end of the year. Reductions in rates certainly help growth and markets typically. We are hopeful that the Fed will be prudent with these rates reductions and not necessarily overreact.
At Legacy Wealth Alliance, we don’t follow the crowd. We make decisions on facts and data. We don’t need to follow the “hype” when all the fundamentals, low unemployment, strong quarterly GDP estimates, etc., signal a strong economy. At the same time, we are not “falling asleep at the wheel” either. Your wealth and investments are important to you. And as your advisors, they are important to us as well. We take the relationship you have allowed us to have with you, your families, and your businesses very seriously and promise to work hard to maintain that relationship. Where are competitors may be afraid to talk to their clients about what is going on, we want you to have our perspective as best we know it, before you call. We also look at this as an opportunity to distance ourselves from our competitors and gather new clients. Feel free to share these commentaries with whoever you feel could benefit. While we may not have all the right answers, we are never shy of sharing our thoughts and making decisions together with you that are in your best interest.
It is important to find courage to continue over concern and the reaction that you need to “do” something. If this gets too overwhelming, please reach to us as we are always here to help. We will continue to monitor the markets day by day and provide updates and communication, providing what we know as things progress. We work for you, so feel free to reach out to us should you have any additional questions or comments. Thank you again for your continued business and faith and trust in our abilities. We value both immensely.
** (Brinker Capital:Quarterly Commentary)
*** (Foreign Policy: “After Virus Peak, Beijing Tries to Get Back on Track”)