The coronavirus has radically affected the lives of everyone in this country – and, indeed, the world – in an unprecedentedly short amount of time. News of it on the radio, TV, and internet seems all-consuming. This piece is not intended as an update on the virus, because by the time it’s published any news contained herein will be outdated. Instead, the purpose here is to discuss the investing environment, both during this crisis and beyond.
Let’s begin with an economic and market review of the first quarter of 2020. No getting around it: March was an awful month. There were very few places to hide, as the markets bore out one of the largest and fastest drops on record. Only a handful of stocks made money during the month; even bonds were under pressure, as correlations tightened between asset classes. While March also tallied one of the best weeks in Wall Street history, it saw the Dow, the S&P 500, and the NASDAQ each sink more than 10%. A bear market started, but technically ended just a few days later, as the indexes moved above the negative 20% line toward the end of the month. Year-to-date returns are even harder to stomach, though the Aggregate Bond Index showed a gain of 3.15%. For most investors, however, YTD returns were somewhat mitigated, depending upon the level of equities within their portfolio. Volatility has returned and is likely to stick around for a while, and investors are growing somewhat used to the 500-point-plus swings the markets have undergone daily.
Economic news changes by the minute. As of the time of this writing, estimates have placed GDP from slightly positive to slightly negative in the first quarter, with second-quarter estimates ranging from negative single digits to as much as a 30% decline. Unemployment from 10% to 30% is forecast and prices on many goods (e.g., oil and gas) are falling hard, while others seemingly are rising (e.g., paper goods). The inherent problem with any estimates is that no one really knows how long all of this is going to go on, nor how people will react should it go longer than most expect. Similarly, no one can foresee how things will play out once this crisis is in the rear-view, either. Initial forecasts assume there will be so much pent-up demand that things will rebound sharply in a V-shaped recovery pattern; more recent projections show a U-shaped recovery, where things will stabilize at the bottom for some time and then rebound sharply, though it is impossible to know how long the middle stage will last. The latter is a “Fall, then Stall, then Surge“ process, with common thinking putting the economy at or near the bottom of the Fall stage now. The Stall may last until early 2021, with the Surge occurring throughout that year.
Some key investment advice to keep in mind, as things progress over the coming days, weeks, and months:
- Stocks still offer the best long-term results. This is nothing new; however, in recent years, expectations for future returns had come down, as price-to-earnings ratios expanded. Now, future expectations will be higher, with returns expected to be above normal for a few years at least, once the virus is contained.
- Stick to your plan. Making sure you have an investment strategy and have set your asset allocation accordingly should allow you to focus on the long term and look past shorter-term events. In addition, reviewing and rebalancing may allow you to harvest tax losses and provide increased returns as markets recover.
- Don’t try to time the markets; it rarely works and usually hurts returns. The investor that stays the course recovers faster than the one that attempts to time the markets. Many of the best days occur within two weeks of the worst days, as evidenced by the past month. In other words, wait for the rainbow at the end of the rain!
Many have wondered if the markets have hit bottom yet. Again, no one knows, and things are a bit different now than in past bear markets and recessions. Typically, the economy heads into a bear market after a melt-up, as retail investors join the party and buy, buy, buy. That didn’t happen this time, as the markets moved higher, but did so along with cash balances. This was thought to be a sign that a bear market wasn’t imminent, yet it happened over the course of just three weeks without a melt-up occurring. Similarly, the markets typically hit bottom when retail investors have had enough and liquidate their holdings. Again, as on the upside, this has not happened – yet, at least. There are many who believe retail investors won’t throw in the towel – and our experience, so far, is that more clients are looking for opportunities to buy than sell.
So, what to do? As I stated in my last post:
- Work with us to review your long-term plan or strategy, or to establish one if you do not have one, that takes your goals and objectives and risk tolerances into account. This will provide you with an anchor during the storm.
- Once a plan or strategy has been reviewed and confirmed, adjust your portfolio as necessary. A diversified portfolio doesn’t guarantee that you won’t ever have losses, but it smooths out the ride and may allow you to sleep better at night.
- If possible, dollar-cost average your way into the market. This will allow you to take advantage of lower prices for some of your investments.
And again, it bears mentioning that we are not overreacting to current events, but remain mindful of them. We have taken steps that we feel are appropriate, given both current events and future expectations, and will continue to do so as conditions merit.
Please call anyone in the Wealth Management department at State Bank of Cross Plains at (608) 826-3570 to discuss these, or any other, issues that you may have. We welcome your feedback and thank you for your business.