Market Update: Living in a New World
In this Market Update, you will learn:
- How recent volatility compares with the past market corrections
- The future impacts of rebalancing a portfolio during down markets
- How bonds are performing in the current environment
- When you should consider buying stocks
Markets are typically driven by a combination of financial data and investor psychology. Earnings reports and other such data, however, have become meaningless recently. Instead, we are monitoring fear and pandemic curves.
The flattening of the pandemic curve is necessary for our healthcare system, but it will come at a huge economic cost. This cost cannot be measured in dollars alone. It will be measured in bankruptcies, lost jobs, lost homes, lost pride, and lost confidence. This event could leave a mark on society much like the Great Depression had on our parents or grandparents. Without a doubt, this will not be forgotten by those old enough to remember it. One difference between now and then, however, is that our government has learned from prior economic mistakes and is implementing massive stimulus packages to lessen the damage.
No one knows what the economic reality will look like at the end of this, but I do know that fear usually overshoots reality and can worsen the reality to some degree. When fear is at its greatest, there will be financial opportunities for those who are ready. Even with the stock market losing about a third of its value, I am hesitant to say that fear has peaked. The Volatility Index, also known as the VIX or the “fear index”, suggests otherwise. The VIX represents expected stock market volatility over the coming 30 days. The chart below shows that expected volatility has exceeded the levels reached at the market bottoms in 2002 and 2009. Because of this, buying of stocks makes sense in moderation.
The bond market is also showing disruptions similar to what occurred in 2009. Liquidity is becoming an issue and the yield (interest rate) difference between corporate bonds and government bonds has reached recessionary levels (i.e., investors are demanding a very high interest rate in order to purchase corporate bonds). High quality bonds are generally performing as expected, but have also exhibited volatility as interest rates have fluctuated considerably. Our decision to increase the quality of our fixed income portfolios in the past is now providing benefits.
In addition to the high VIX levels, the market is exhibiting other signs that it could have put in a major bottom. We’ve seen the low from December 2018 taken out followed by strong demand as evidenced by a 20% stock market rally. Personally, the current level of desperation does not yet seem as severe as in 2002 and 2009. We are getting close, but are likely not quite there – either that or my years of experience have increased my tolerance. Also, fear chooses its own time frame. In 1987, it reared its head in one day, causing a market drop of 23%. Sometimes it takes years. No matter the duration, the bottom is always marked by climactic action. After such climactic action, the market will frequently exhibit powerful upward movements and may not give investors a good opportunity to get back into the market. Because of this, we will not attempt to time the bottom. We will buy stocks as the market is falling, and possibly as it begins to recover, too. A less sophisticated plan, such as rebalancing just once per year, has proven beneficial in historical studies.
Investors need to avoid being paralyzed by fear. When panic selling occurs, are you going to be calling your adviser to get you out of the market, or are you going remain calm and see the opportunity? Taking advantage of the opportunity requires a plan and the courage to execute it. The difference could greatly impact your future – just ask those that panicked in 2009. Having the ability to buy stocks when others are fearful can dramatically shorten the time it takes to get back to even. Also, missing out on strong up days in the market can be as equally damaging as experiencing large drops. The focus always needs to remain on the long-term plan, not short-term reactions. I am extremely proud of our client base and their ability to navigate these challenges to date.
I want to leave you with one more challenge. The opportunity in front of us is not solely a financial event. There is a huge opportunity to reap many benefits from all of this. You have the opportunity to act as a beacon of light for friends, family, and society. You can be an example of how to focus on the positives and be part of the solution. You can promote unity – we have been missing that in our society recently. Also, take time to be grateful for what you have. Most of us reading this are among the most abundant individuals on this planet. Finally, find a moment of stillness to be aware of your actions and what you are bringing to the world.
We thank our clients for their continued support. This crisis will eventually pass and we will all benefit if we have the awareness and gratitude to notice it. We can do this, together.
- To learn more about portfolio management during a crisis, read this report: 3 Critical Steps to Weather An Economic Storm
- To learn the benefits of maximizing tax efficiencies in an investment portfolio, read this report: Don't "Beat the Market," Maximize Your Bottom Line
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