Author: Jamal Anderson

Looking Back on the First 5 Months of 2020 and Looking Ahead

The S&P 500 index has rallied more than 30% from its low on March 23—reinforcing the adage that it usually pays to stay invested over the long term instead of selling out during the dips.

Even with the recent uptick in the market, it is important to realize that the economy has quite a distance to go before it gets back to where it was at the beginning of the year.  We remain cautious but optimistic.    

The economy was shut down temporarily in response to the coronavirus pandemic.  The market reacted by dropping precipitously, with the Dow Jones Industrial Average losing 10,000 points in a month.  What started out as a medical concern became a financial crisis.   

Those that felt the economic impact the most included people like restaurant workers, retail employees, barbers and hairstylists, and other similar modestly paid workers.  Many small business owners found themselves unable to even open their shops because of a government edict.  Investors felt the impact when they saw their investment portfolios decline sharply.  Everyone has a financial pain threshold, and it becomes increasingly difficult to remember your long-term objectives when faced with increased levels of short-term pain.

The media focused on every bit of bad news.  A seemingly endless streak of negative statistics were highlighted.  There is no denying that shutting the economy down to reduce the spread of the infection had a massive economic impact.  Unemployment shot up.  Air travel and rail freight plummeted.  Restaurants, theaters, hotels, convention centers and sports venues closed.  Corporate revenues plummeted.

The government reacted by enacting the $3 trillion (with a T) dollar CARES Act that distributed relief checks to the vast majority of Americans.  The same legislation distributed money to small businesses via the Payroll Protection Program to encourage small businesses to continue to keep people employed.  There is talk about another round of stimulus – equally as large if not larger — to continue stimulating the economy.

We are not sure when or if the economy will resume its former track.  There is a very fundamental reason why this economic drop is different from any other.  This one was caused by a government decree based on medical fears rather than a structural economic problem.   Government decrees can be reversed nearly as quickly as they were implemented.  How the economy will react remains to be seen.  There will undoubtedly be lingering aftereffects.  But the stock market is a leading economic indicator.  The rapid recovery of the stock market thus far indicates that investors view the future with more optimism than the merchants of gloom.

Bear Markets are Painful but Markets Rise Over Time

A “Bear Market” is defined as a decline of 20% from recent highs.  By the time you read this, we may be in a bear market or we may have recovered from a mere correction that began in February.  For people seeking a better return on their savings than what the banks offer, the ups and downs of the stock market are a natural part of the investing process.  It comes with the territory in return for the long-term growth rate that defines owning a piece of American industry.

Bear markets can be painful, but overall markets are generally positive over time. The last 90 years of market history have been defined as bear markets for about 20 of those years. In other words, stocks have been on the rise 77% of the time.

From 1926 through 2019, the average annual stock market return was 10.2%.

For the five years ending 2019, the Dow Jones Industrial Average (DJIA) returned 12.2% annually (accounting for dividends).  Over that same time, the yield on CDs – after factoring in taxes and inflation – lost purchasing power.

One of the reasons our phones don’t ring off the hook when markets decline is because most of our clients have seen it before.  This isn’t their “first rodeo,” as they say in country songs. For those who are new to investing and who may get nervous, here’s a bit of history:

  • There have been 26 market corrections since World War II.
  • Those declines have averaged -13.7% over 4 months.
  • It took the markets an average of 4 months to recover from those declines.

To smooth out that ride, professional investors create diversified portfolios of stocks and bonds, domestic and international, creating portfolios that allow them – and their clients – to sleep well at night.

Registered Investment Advisors (RIAs) offer these money management services to individuals, families, and businesses who want help.  We are Certified Financial Planner™ professionals and have worked with hundreds of people just like you to grow and maintain their wealth.

We invite you to schedule a meeting to visit with us, have a cup of coffee and a chat.  We promise no sales pitches and honest answers to your questions.    

Thoughts on the Coronavirus

The Coronavirus has been in the news for a while now and fear in the press has started to spill into the financial markets as the disease spreads out of China.  If the virus lingers much longer, it could accelerate the move of production from China to other countries, maybe even encouraging American companies to bring manufacturing home.  Over the long term it could actually help our economy.

But what about the short term?  Here’s some commentary from First Trust that we think makes a lot of sense.

Time to Fear the Coronavirus?

Monday, fear over the Coronavirus finally gripped investors, as both the Dow Jones Industrial Average and the S&P 500 index fell over 3% – the largest daily declines in two years. These drops wiped out all the gains for the year.

Frankly, it’s amazing to us that the market had been so resilient! Maybe it’s because recent history with stocks and viruses is that markets overreact leading to significant buying opportunities along the way. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%. There are other examples, but they all passed, and the market recovered and hit new highs.

Will this happen again? Our view is that it is highly probable.

We aren’t trying to be immunologists, and that may make our points moot, but there aren’t that many immunologists in the world and the World Health Organization says this is not yet a true pandemic. We’re just economists, but looking at the data, and having perspective is always important.

This whole thing is a human tragedy and we would never take human life and suffering lightly. And looking at data can make people appear cold, when in reality all they are trying to do is understand the situation. There are currently 80,088 confirmed cases and 2,699 deaths from the coronavirus COVID-19 outbreak as of Monday. This is a big number and is still growing, but the pace of growth looks to be slowing.

Much of the pessimism surrounding the virus focuses on the Chinese under-counting the number of infected to save face. However, it’s important to note that a shortage of specialized test kits has caused health officials in many countries to rely on observable symptoms for diagnoses, and because coronavirus mimics the flu and pneumonia in its early stages, it’s also possible that authorities may be over-counting as well.

Instead of looking at it from a total confirmed case perspective, we think the number of total active cases provides a better look into what is happening. This measure takes total confirmed cases and subtracts deaths and recoveries. This gives the total amount of people who have the potential to spread the virus further.

According to Worldometer, which aggregates statistics from health agencies across the world, total active cases peaked about a week ago at 58,747 and have since been declining. Even with all the new cases we are seeing in South Korea, Italy and Iran (where data is suspect). There have been 30,597 cases with an outcome (2,699 deaths and 27,898 recovered). In other words, the total active cases now stand at 49,923, a drop of 15% from the peak on February 17th.

One death is too many, but to put that number into a little bit of perspective, according to the World Health Organization, in the United States alone for the 2019-2020 season, there have been at least 15 million flu illnesses, 140,000 hospitalizations and 8,200 deaths. Imagine if everyone with an internet connection followed the spread of this annual flu, case by case, hour by hour.

It’s true that the death rate from Coronavirus appears to be around 2% in China, which is much higher than the death rate from the normal flu, but like the flu increases with age. However, outside of China the death rate is far less than inside China, roughly 1%. And, there is already a drug that will combat COVID-19 moving toward first phase clinical trials. It took three months for this to happen in 2020, versus 20 months for SARS back in 2002/03 – a testament to advances in drug technology.

From a macro-economic point of view, the real question is how will this impact the US economy over the coming year. In short, our view has not changed. The US we believe is relatively insulated, with a fantastic health system. The US started the year with solid economic data and so far, nothing has changed. In fact, with all the data we already have on hand, we are expecting around 2% growth in Q1. Most of the impact to the US from the corona virus will come in Q2.

Capital goods exports to China along with imports from China are sure to be depressed given the struggles to reopen factories abroad. Most Chinese factories are still only operating at about 50-60% of capacity. Shipping giant Maersk has already said it has cancelled more than 50 trips to and from Asia. With China being home to seven of the world’s busiest container ports there is bound to be some impact. Inventories in the US will be depleted more rapidly, but once the virus subsides, expect faster accumulation of inventories in the second half of the year.

Revenues and earnings from companies that are highly exposed to China will definitely be affected. China being shut down for a month will have a global impact. But lower earnings in the first half of the year should be made up by a strong rebound in the second half of the year with payback from lost months. Demand remains strong and there has been no visible impact yet on the job market as shown by initial unemployment claims. Supply disruption is the issue. We suggest looking through any earnings weakness as we expect it to be transitory.

One small nugget of good news is that many companies had already been shifting supply chains from China due to the Trump Tariffs. If they weren’t considering it before they will be now as they realize the importance of diversification. Expect this trend to accelerate moving forward.

The US consumer is on solid footing and will continue to be one of the key drivers to US economic growth in the year to come. We believe, just like all the other viruses we have seen over the past decades that have dissipated, the Coronavirus will be no different. Some have suggested that the 1918 Spanish Flu, which killed hundreds of thousands in the US could happen again. No one knows, but 2020, is not 1918. Technology and news move much faster and the US rebounded from the Spanish Flu when all was a said and done. We suspect that any drop in earnings or economic activity will be short lived, and more than made up for in the year to come. Don’t panic, stay invested.

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist  

Market Timing Is the Enemy of Investment Success

Let’s talk about the stock market. The bull market is currently over 10 years old.  Does that make you confident, seeing double-digit returns as a sure thing? Or does it make you worried that maybe we’re close to another market decline like 2007-2008?

The problem is that whether we start talking about the exuberance of the market or the exuberance of investors if we make wholesale portfolio changes based on either viewpoint, we’ve made a market timing decision.  The next Great Recession has been predicted ever since the market began climbing again in 2009.  Those who acted on those predictions at that time would have missed one of the biggest bull markets in recent history.

There is no shortage of money managers who insist that they can successfully time the markets. Many seem credible and some may even be able to cite specific examples of success they have had in doing so. They may truly believe that they have discovered a valid timing process.

But the line between luck and skill in money management is hard to discern, even for those doing the managing. There are many examples of money managers who were lauded as market geniuses after great runs of performance only to crash and burn. Once you start to play the market timing game, you set yourself up for almost certain failure.

What we need to do is to reframe the question entirely. We shouldn’t ask, is the market heading for a drop soon?  We know that stock markets don’t go straight up forever and that there will be a correction at some point in the future, after which the market will rebound again.  Instead, we should ask what is it that we control, and should we be making changes in the things that we can control? We can control how much we save and spend.  We can control how much risk we take.  And we can control our own investor behavior.

Asking someone what’s going to happen to the financial markets is an exercise in fortune-telling.  The best thing to do is to forget about trying to consistently accurately predict the direction of the stock market and start to think about risk.  Ask yourself if there’s a serious chance that you’re going to panic and sell your positions if the markets, and your portfolio, happen to drop 20% or 30%.  If the answer is yes, you’re taking too much investment risk.  At some point, we are going to get a stock market correction.  The question you should be asking yourself is “What would I do if it fell by 10%?  By 25%?  By 50%?  That’s a risk question.  Do you know how much risk you are taking?  Do you know what your actual risk tolerance is?  Do you know how much risk is really present in your current investment portfolio?  If not, give us a call to get your risk number and the risk number your investments are taking.  If they match up, then you will have a lot less to worry about the next time the stock market falls.  If they don’t, we can make recommendations to get them more in line so that you don’t panic the next time the markets decline.

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