We hope and pray this message finds you and your loved ones safe and healthy.
This is a longer than usual newsletter as we want to recap the first quarter and also discuss staying the course with your retirement strategy (I.e., there is some good stuff in here…hang tight with me).
The first quarter of this year has been painful…as frequently happens when exogenous events (the Corona virus) hit the markets and economy, almost every asset class correlates and goes down. The usual defensive portfolio of 60% equities (stocks) and 40% bonds did not protect investors as bonds came under duress simultaneously with equities. In a more normal equity market draw-down, the bonds are counter-cyclical (negatively correlated) and dampen the portfolio’s draw-down. But in this crisis, stocks, bonds and gold all fell in tandem as the usual benefits of diversification were temporarily suspended. One notable exception, government bonds, did rise in value as investors fled to their safety, but not many portfolios hold these types of bonds day-to-day as their yields are negligible at best.
For the vast majority of us, this has undoubtedly taken an emotional toll seeing the markets move down so drastically. We are the investor generation that has gone through this three times…the 2000 Tech Wreck, the 2008 Great Recession, and now the (we get to name this one…please send in your ideas…my vote is…) Pandanomic Correction.
In our previous newsletters we have often noted that we were in the late stages of the economic cycle, but nobody could have predicted that the US economy would be brought to its knees by a microscopic organism (except Bill Gates, see his TedTalk, March 2015)
Certainly, the outlook for the rest of the year is uncertain and nobody (no, not even Bill Gates this time) knows when this disruption will end, and how deep and long the subsequent recession will last. Personally, I believe our brilliant scientist and medical professionals (wrapped in the loving arms of the greatest country on earth) will soon prevail with several viral submission drugs, convalescent plasma immunity transfusion, and a vaccine. With that accomplished, we can go back to work, living our lives in a normal fashion, and the economy will bounce back.
Here is some perspective on the last three months -
The VIX, which measures the implied volatility of the S&P 500 and is the market's best prediction of near-term volatility, usually with expectations of a down market, was up more than 300% for the largest quarterly gain ever. This marked the end of the 11-year bull market and the inception of the fastest bear market in history. This turn of events from a record bull market to a bear market (defined as a -20% drop in price) took a little over two weeks to occur, versus the historic average of ten months.
Does the market (aka, investors) overreact? It sure does, the VIX peak was reached even before the first announced shelter-in-place was ordered. The skittish nature of investors and concurrently the market is constantly demonstrated by its react first, determine the facts later.
As mentioned in our previous newsletter, the Fed cut interest rates to zero. In an unprecedented move that drives hope this recession will be extraordinarily short (the average is 11 months) is the $2T CARES Act which amounts to over 9% of the US GDP.
During the Great Recession, fiscal stimulus was only 5% of GDP. As painful as it was, the lessons we learned from the Great Recession turn out to be templates for dealing with our most extreme economic events.
Business closures, social distancing and fear are likely to persist into 2021 as our experts in the medical community tell us a vaccine will not be commercially available until next year. Our continuing theme to clients is economic activity and market movements do not go hand-in-hand and staying the course with your retirement strategy is crucial. As much as investors may feel like selling everything when you have periods like the plunge to March lows, recall that in a matter of 3 days the S&P 500 re-gained +17.2%. So, even during bear markets, the market does not go straight down, and building a market bottom often takes months of market gyration (and frazzled nerves). In looking back to 2000 and 2008, there were several times the market gained 10%+ and subsequently dropped again before the next bull market started. Although market timing is very alluring, if you missed the best day over each of the last 30 years your annual return as nearly cut in half.
Our collective 100 years of experience in investment and retirement planning tells us, in light of the current events and our experience with its historic predecessors, to be proactive, but not to overreact. Make sure you have a strategy, have faith in your strategy, and it will help you stay the course, no matter how rocky the path. Remember, despite everything that has transpired this quarter, we are essentially back to early 2019 levels, which is still a healthy gain from the Great Recession lows. Please let us know if you have any questions or would like to schedule a review.
Dave & Drew