Please be confident we are closely following the financial markets and the continued volatility that may be impacting your confidence as an investor. Since the last update we sent to you, global markets have increased in their volatility due to the uncertainty the spread of COVID-19 (Coronavirus) will lead to reduced economic activity not only at home, but world-wide. Adding to this uncertainty, an oil price war between Russia and Saudi Arabia developed last Friday which has exacerbated the volatility and the concerns of a global recession.
At this moment, it’s impossible to forecast whether a recession will occur as a result of COVID-19 and oil oversupply concerns, and their impact on the global economy. History tells us outbreaks are eventually contained, and recessions are a part of market cycles. We strongly believe knowledge is power, so let’s take a minute to look at the facts as we know them:
In terms of the economy:
- A Reuters poll last week found economists’ projected probability of a recession within the next year had increased from 23% in February to 30% in March. An indicator-based model used by the Federal Reserve (the “Fed”) projected a 2% chance of a recession as of January, while a yield-spread model produced by the Federal Reserve Bank of New York projected a 31% chance of a recession as of February. Economists may not be able to predict a recession, but survey probabilities generally do reflect underlying trends. But it’s important to note that while these chances of a recession have increased (as would be expected), these results still suggest the experts believed there’s a greater than two-thirds possibility that a recession was not on the near horizon.
- Through the end of February, U.S. employment, housing, and economic growth data (GDP) were all strong and encouraging. While it’s likely data related to these components of the economy will take a hit, we are fortunate that the events of recent weeks have come on the back of a strong U.S. economy, and this foundation should allow for a quicker recovery once more positive news comes our way.
In terms of the Coronavirus outbreak (as of 3/05/2020):
- Total active cases peaked on February 17th at 58,747 and have since been declining.
- There have been 57,491 cases with an outcome (3,356 deaths and 54,135 recovered).
- The total active cases now stand at 40,575, a drop of about 36% from the peak on February 17th.
- Previous Outbreak Comparisons:
- In 2002, Severe Acute Respiratory Syndrome (SARS) had 8,098 confirmed cases and 774 deaths, a mortality rate of about 10%.
- In 2012, Middle Eastern Respiratory Syndrome (MERS) had 2,494 confirmed cases and 858 deaths (as of Nov. 30, 2019), a mortality rate of 34%.
- The Coronavirus has infected over 98,000 people, and while the death toll has risen above 3,350, the mortality rate is at only 3.4%.
- The above facts confirm that while the COVID-19 virus is much more contagious than the SARS and MERS viruses, thankfully the mortality rate is showing to be significantly lower.
The most important thing to keep in mind is to not overreact to the headline news which can often create unnecessary panic. As of this writing, the S&P 500 index fell today past the 20% drop mark from its previous high back in mid-February causing the media to immediately use the term “bear market”. Many would argue that a true bear market requires this level to be sustained for at least two months, and right now we are just one day in. But for sure we have entered bear market “territory”. But also, in the news today - Congress is considering adopting measures targeted to stimulate the economy to assist our ability to weather these current challenges. How will the markets respond to this “good news”?
Markets have proven resilient over time and it’s important to maintain discipline and to focus on your long-term financial goals. While the short-term market outlook may be discouraging, the intermediate- to long-term outlook remains more positive. In fact, you may want to consider a couple of things: 1) If you have the means to do so, consider taking advantage of “buying on sale” by using dollar-cost averaging (making regular additions) while rebalancing your portfolio, and 2) times like these are a perfect time to re-evaluate your risk tolerance. All this being said, we strongly suggest you always maintain a long-term investment approach, and if you’re finding it difficult to do so we suggest you need to ask yourself whether you should be an investor at all.
Don’t ever forget, while a loss on paper may be difficult to look at, it is never truly a loss until you sell. Case in point: The total return for the S&P 500 over its current 11-year bull market (i.e., March 10, 2009, through March 6, 2020) is a gain of 16.8% per year (total return). If you missed the 20 best percentage gain days during this time (i.e., 20 days in total, not 20 days per year), the 16.8% annual gain is cut in half to an 8.5% annual gain. There were 2,768 trading days over the time period cited above—that means if you did not stay invested in the wrong 0.7% of the trading days over this 11-year period you cost yourself big-time! This is why we encourage our clients to ride through the big waves. If you move your money to the sidelines at the wrong time and miss some of the big ups that usually occur when we’re least expecting them to then it will make your personal recovery take that much longer. This reminds us how many of our clients thanked us after the 2008-09 financial crisis for helping them to hang in there when their emotions were telling them to do otherwise.
We never want you to feel like you are riding through these times alone. We are here to support you and to help you navigate these times of uncertainty. Knowledge is power, and we’re committed to equipping you with the tools and information you need to weather this storm. As always, if there’s anything we can do to help you make good decisions during this time please don’t hesitate to contact us.
Pat Benson Steve Hill Justin Gibson Jeriod Turner