Context is needed, information is scarce and the unknowns of the market and the Coronavirus are leading the news coverage. So in our usual process we want to provide perspective, remind you of our process and talk about your individual plan.
Market Perspective: Bear….Bull….Bear?
On our March 6th Update – We discussed the 7% moves within the market and how often they happen. We have mentioned how many 10% corrections have happened since 1946: 26 (as noted by JP Morgan Guide to the Markets). And since 1926 we have had 10 Bear Markets (stocks being down more than 20%, as noted by JP Morgan Guide to the Markets). Note the chart above. I am certain none of us want to be reminded of that time period in 2008-2009. The market hit a high in 2007-2008, then the low in March of 2009 and the market came back to break even in 2012; ultimately leading to a 400.5% Bull Market gain from the bottom.
That market drop was created by “fundamental” issues within our economy and within our companies being over-leveraged.
The current market drop is “event” driven. This has to do with issues that are still unknown, meaning we don’t know when this “event” will end.
Let’s go back even a decade before in 2000. We had a “fundamental” market drop due to valuations of Tech stocks being extremely overvalued, then the September 11th “event” happened. Those two combined caused a massive drop. The S&P hit a high of 1500, then dropped to 1100 in the summer of 2001 due to the “fundamental” drop, then the September 11th “event” hit and the market dropped to about 800. From that point the market then grew to a high of about 1560 in 2008.*
Going back one more decade to 1987, we had Black Friday, “an event” driven drop. The market dropped over 20% only to recover by the beginning of following year.
Bear market drops of 20%+ have occurred before, about once per decade. “Event” driven drops typically come back faster than “fundamental” driven market drops. Regardless of the reason for the correction, the long term result has proven that those drops were exceptional buying opportunities.
The Process – “Dealing with the Unknowns”
If you ever wonder if markets dislike “uncertainties,” you likely now know the answer given what we have seen the past few weeks. Let’s discuss the “unknowns/uncertainties” and how that has led to such massive swings in the market place.
Keep in mind our theory that the market is driven by 3 primary factors:
Emotion – I have read anything I could find recently on the FLU, various viruses of the past, the Spanish Flu, etc. It is great for context, but provides no real answer or solution. In reality we do not have a vaccination, we don’t quite understand how it is spreading, and we have a basic understanding of the symptoms. Emotions alone can cause people to sell or panic. I can understand why, but we never panic. Our process is based on math, historical data and a process that has proved to work during each of the periods I mentioned above.
Momentum – It is easy to see which way this is going. Traders are selling then asking questions later, but their outlook is based on tomorrow not 12 months from now. Frankly they are guessing at this point and guessing isn’t a great strategy, so they would rather be out of the market, which is exacerbating the selling.
Fundamentals – This is the primary foundation that underlies all we believe in. What are the fundamentals of the companies we invest in? Let me take a few minutes to discuss the current drivers of the fundamentals of the market, hopefully this simplifies some of the “unknowns.”
The Virus: Click here first for Covid Updates – No one knows if this number is going to flat-line, grow exponentially or start to drop. Look at the U.S. As of the time I am typing this we have had 1,323 confirmed cases and 38 deaths – yet the stock market has dropped 20%+ and lost more than 2 Trillion in Market Cap (value of companies). A drop of that magnitude implies that the rate of cases and deaths is going to go exceedingly higher – or is it? China just announced a drop in cases, only 15 announced today. I know we don’t know if we can believe the data we are receiving, but if it is true, since Feb they are seeing their cases come to a flatline, maybe even a drop. Take a look at the orange line in the link above, note the yellow line is all other countries.
The Precaution: I continue to be amazed by the people of this country. In a country that is seemingly so capitalistic, when “stuff” hits the fan, we do what is right. Look at the events, conferences, sporting seasons, travel plans that have been cancelled all for the sake of fellow American lives. Truly amazing sacrifices and decisions are being made to curb the growth of the virus and its potential impact.
The Impact: If china hit a peak of 80k cases, 3100 deaths and 62,000 have recovered, where does that leave the US? Have we hit our peak? If so, the market overacted to epic proportions. The market is trying to forecast what the slowdowns, shutdowns, cancellations etc. will have on our economy. That is the unknown. If Virus Cases have peaked and business returns to normal in the next 30-60 days, the market has probably overcorrected. If the cases continue to climb and this lasts through the summer, then maybe the market is priced accurately. But what happens when business does return to normal? Certain stocks and sectors are going to be really attractive.
The Summary: We have been through market drops like this before. We have recovered from every one of them. We will recover from this drop as well. We need to see the cases flat-line or drop before we will see any meaningful recovery, so we wait patiently and find buying opportunities. Our process has events like this factored into it. We don’t know why they will happen, how or when. We just know they will, so we are prepared for them.
Your Plan: “How are you doing? No really, how are you doing with all of this?”
All of the insight above is what we know, what we do, what we have learned. Every day we get together with our combined >100 years of combined experience to meet to review the markets and our process. Given that, I wish there was a way we could remind you every day that you will be fine. We have a plan for a reason. The plan is built for you. This is why we have the “liquidity buckets,” allocation to bonds, cash etc. It provides stability for you and it provides a way for us to have money to invest in stocks at lower prices. It provides access to cash flow while the markets are down. This is why we review your cash flow needs and asset allocation regularly. We do this so that when we have periods like this, we can weather them – together.
We have received a few emails over the past few days, but I know all of you have questions, concerns, doubts. We all do; we are human. I smile when many of you say, “we know the drill…when stocks go down, we trim some bonds to buy stocks cheaper.” Regardless of the process, we know this is sometimes frightening and reassurance is helpful. So please never hesitate to call us, email us with any questions, even if you just need a little reassurance. I know for myself, that whenever I am dealing with stress, if I review my plan, I find comfort in knowing I have a path paved and a plan in place.
We believe in our process. It works and we will get through this just like we always have.
Be safe and stay well. As tough as this all is to deal with, if there is one silver lining, I continue to be in awe of what Americans can do when we need to act as one when things get tough – some may say “Undivided” :). Kind of funny, that we all probably would just like to get back to “politics” so we can relax a bit.
Link from above on Coronvirus:
*Market data source: Thompson One
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Private Wealth Services, LLC. Undivided Wealth Management is a member firm of Kestra Private Wealth Services, LLC, an affiliate of Kestra IS. Undivided Wealth Management and Kestra IS are not affiliated.