The stock market has enjoyed a couple of years of substantial growth, but on February 20, 2020, it began a steady decline coinciding with an increased awareness of COVID-19 and its potential threat to our health care systems. So, the questions investors ask is; when will the decline end, how far down will it go, and when will it recover?
In my forty years of business, I have experienced many “this is different, and we will never recover” events or circumstances:
- 1982 – 18% home mortgage rates and 10% unemployment
- 1987 – Black Friday and Black Monday 40% market decline
- 1991 – Oil crisis when Iraq invaded Kuwait
- 1998 – Impeachment of a President
- 2000 – Tech bubble burst
- 2001 – 9/11 terrorist attack
- 2008 – Real estate bubble and financial markets crisis
- 2010 – 3% home mortgage rates and 10% unemployment
- 2016, 17, 18, 19, 20 – Attempts to impeach the President
- 2004-Present – SARS, Avian flu, Swine flu, Zika, Ebola, and now COVID-19
All of us want to be in control of our circumstances to feel secure, especially about our money. But we also know we cannot earn enough risk-free income from bank accounts to provide long term financial security. These truths are at the heart of why we use a risk-based allocation method to manage our clients’ investment portfolios.
Whenever times are good in the stock market, we often are asked why we hold bonds in our portfolio. Our answer is always the same, because there will be a day you are glad you have them – I just can’t tell you when that day will occur. Today is that day. Although all portfolios have declined, our portfolios are down on average about half of what the market has dropped due to our bond holdings. Those that are more focused on long-term growth with a more aggressive allocation have dropped more than those that are more conservative investors.
Investors that work with advisors are far more likely to stay-the-course than your average do-it-yourself investor. We have spoken to many clients through telephone calls or e-mails over recent weeks. About 15% of our client base is viewing recent stock market behavior as a buying opportunity, while approximately another 5% have sought a more conservative approach. That leaves roughly 80% of our clients that are viewing recent trends as unforeseeable and temporary.
A client sent the following e-mail the other day, that I believe perfectly sums up our observations, but also how we all as a community can help one another maintain an optimistic outlook.
“I'm writing to see how you and the staff are holding up. I don't think anyone could have foreseen the cataclysmic events that have befallen us. I do believe that the market will come back but I also believe that this time there's been a lot of economic damage/carnage that some businesses will not be able to recover. A lot of 'little guys' are going to suffer. We will live on and through this with a lot of changes economically, socially, politically, and globally. I hope that you and your family are well and stay well. “
Fear is powerful. The news continues to show us empty shelves at grocery stores. “Will I be left behind?” is logical question. I am sure our governing agencies desire to keep us calm and safe. They most likely believe it is better to over-react than to under-react, and they are probably correct. Unfortunately, I believe they may be acting hastily, and the media seems to either misrepresent the facts or is confused by them. Either way, we have faith that this too will pass, and we are willing to do our part in acting responsibly.
Our firm’s objectives are to: listen to clients and understand their situation and concerns, provide insightful and reliable information, think, use our knowledge, experience and discipline, and act carefully and prudently.
Friends and clients, we encourage you to stay informed, stay safe, stay calm. Work with your families, friends, neighbors, and advisors. We are here for you and will continue to be a voice of rationality.
Remember, this will pass soon enough, and we will recover.
Final Comment
A common question during market declines is, “How much more do you think my account will go down in value?” My answer is always the same – it depends on the cause of the decline.
This market decline is centered on the world’s reaction to a virus which is considered deadly to some senior citizens and those with compromised health issues. The financial concern is primarily about disruption to our marketplaces, world trade, and the travel and hospitality industries.
The end of the stock market decline should coincide with the end of the threat of market disruption. This does not mean we need to have eradicated COVID-19, but rather, health care professionals must believe that it is not out of control and threatening our health care systems worldwide. We may get these assurances in the next two weeks, two months or more.
In the end, there will be a day when the savvy investor sees stock price bargains everywhere and is more than willing to buy the shares of very good companies at prices that are too good to pass up. This is how the rich get richer, and the fearful lock in their losses. This is not a recommendation for clients who have a conservative outlook, and we advocate you maintain an appropriate strategy for your circumstances.
Please contact us anytime you have questions or concerns.
Michael Sackett
President, Sackett Financial Group