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My Thoughts on the Market

(Written March 9, 2020)


It’s hard to believe that the stock market just reached an all-time high less than three weeks ago. It’s also hard to believe that a virus that has caused approximately 4000 deaths would be enough to topple the global financial markets in just a dozen trading days, but here we are!

As I was driving into the office this morning, I got the feeling that it was time to put together another letter and share my thoughts on what has been happening with the markets over the last two weeks, or so. Perhaps it is overdue, but I feel like these types of letters have become more difficult to write (compared to just a few years ago) because I want it to be relevant, timely, informative, and quite frankly, something a little different than the hundreds of other letters and messages that I already see online and in the world of social media with the same sage advice of “staying the course” and “sticking to your long term financial plan.”

Even though many of our clients already know the general message of what I’m about to write (we’ve been through similar and much worse declines together), I still think it’s important to address it and discuss it because we are going through another period where it feels like unprecedented times and it feels like the market has entered “panic mode.” I can tell that because I’m seeing words like, “Plummet, Rout, Destruction, Crushed, and Plunge” to describe what the markets are doing throughout the day. While I know we are not counted-on to provide the news and the headlines, I feel like we need to do our part to combat those headlines, “fight force with force,” and help folks filter out the noise so that we can make smart decisions with our money and not lose too much sleep in that process.

Rather than just share or regurgitate what I’m reading from the so-called “experts,” I want to share my own opinions that I’ve been forming about the various factors involved and try to make this more than the normal “try not to panic” letter.

  • Coming into 2020, the markets felt a bit overextended as 2019 was a year of very low volatility and very strong gains for the stock and bond markets. While some sort of correction was widely expected, we never know exactly when it will hit and we never know what the catalyst of the downturn will be…and it usually isn’t anything that the financial media is watching.
  • I read a lot of “What to Expect in 2020” newsletters and commentaries at the beginning of the year and I can say absolutely nobody was mentioning the coronavirus at that time. However, that’s what creates the panic and the fear around these downturns that we experience. Things like this blindside the market causing an initial shock and then it typically takes a few weeks/months for the market to digest the impact and figure out where the market should be trading given the new set of circumstances.
  • We only have to go back to the fourth quarter of 2018 to find the last correction that we’ve experienced. It may be hard to remember that difficult period as much of it happened around the holidays, but the market dropped approximately 20% over a period of about 3 months, mostly fueled by trade war tensions and the risk of a recession. As of today, the market has not yet hit the 20% mark (although it is now very close after Monday’s market action) with this current downturn, but the main difference is the amount of time that it took for the markets to drop. This current drop started just two weeks ago and the drops have been very swift with only a few rebound days mixed-in.
  • Many investors will ask questions like, “What should we be doing with our portfolios during this correction?” The answer is almost always “nothing” and that is NOT because we think we’ve hit the bottom or that things won’t get worse before they get better. We’re not making that type of “call.” It’s because we know that corrections like this are normal, the market has always recovered from corrections and downturns, and if you sell after the stock market drops, you drastically limit and/or reduce the ability to recover those losses when the market recovers. We never want to try and time the market and we will not be able to know when it’s a good time to get back in. To me, that’s a short-term solution that might make you feel better right now, but it will not help you achieve your long-term investment goals.
  • A good example of this is to look back exactly 11 years, to March 9th, 2009. With the benefit of hindsight, we are able to identify this date as the bottom of the bear market that was taken down by the financial crisis. The cover of the Wall Street Journal that morning read, “How Low Can Stocks Go?” as the market was still in panic mode and it continued to feel that way for weeks following March 9th. It wasn’t until several months later that we could look back and know that the market had, in fact, bottomed, and that March 9th was the day that the market finally reversed its course. As we’re going through these periods of volatility on a day-to-day basis, it’s nearly impossible to identify the exact bottom. There’s no formula or scientific equation for it usually happens amidst the panic and chaos.
  • One positive aspect of this downturn is that the bond market and bond investments, in general, have been holding very steady and performing well throughout this downturn. Diversified and “balanced” portfolios will notice that they have not dropped nearly has much as the S&P 500 Index has dropped. The conservative portion of the portfolio has been doing its job which has been very helpful. That’s one of the main reasons that we have exposure to bonds in the first place.
  • I am concerned with what is going on and I’ll admit that I am more concerned today than I was on Friday of last week. I certainly don’t want to give the impression that I’m “cool as a cucumber” and not worrying at all about this. While this had the appearance of just a normal correction just a week ago, we’re now also dealing with oil prices dropping substantially and the bond market yields are also dropping drastically. That’s two additional major factors that now need to improve before we can feel better about the market and economy getting back on track. The 10-year Treasury is now below .50% as I write this, and we’re experiencing record lows across the board in the bond market. There’s now real concern that the US will fall into a recession and possibly a negative interest rate environment which is not what you want to see for the overall health of our economy.
  • I hope I’m wrong, but I don’t believe we’ll experience a “V” shaped recovery where the market bounces back quickly and we return to all-time highs again soon. Instead, I think this will take a longer time (possibly months) to recover and the recovery chart will look more than an extended “W,” or perhaps more like “WwwwwW” before we fully recover. My reasoning behind this is because we’ve just experienced a major shock to the system in a short amount of time. There are still a lot of unknowns out there when it comes to the coronavirus, and now additional uncertainty with the oil market and that impact on the financial system. This has turned into more than just a short-term drop, in my opinion.
  • Certainly, we need to see improvement with the coronavirus in order for the market conditions to improve, but we’re now also dealing with collapsing oil prices and collapsing bond yields, and they have now perhaps become more important factors and influences on the markets than the coronavirus. I don’t mean to add to the fear and panic, but these two issues are now adding more downward pressure to the banking system at a time when it is already becoming fragile due to the fears of an economic slowdown. I think in order to see the market bottom and reverse its course, we need to see improvement in all three areas.
  • For low oil prices to cause damage to the U.S. economy the price has to stay this low for a while and that is not the most likely scenario, especially if the coronavirus slows and the global demand estimates rebound. In the meantime, hopefully we can benefit by lower prices at the pump. With interest rates dropping sharply, many folks can also benefit by refinancing their mortgage.
  • The other “silver lining” with this correction is having a better entry point for investors with cash that they were looking to invest in the stock market. The timing of this is also a bit tricky, but the market is now almost 20% lower than it was just two weeks ago and I think we’ll look back on this at some point as a good buying opportunity.

For additional market commentary from Raymond James, I am including a link to Thoughts on the Market: Emergence of Two Black Swans, also written on March 9, 2020.

I wanted to share one more thing related to the coronavirus. I think everyone reading this should take a look at this website and then share it with your friends and family: https://www.worldometers.info/coronavirus (please note that this website is not endorsed or verified by Raymond James). Of all of the informative websites and articles that I’ve come across related to the coronavirus, this is the best one that I’ve seen, so far, and it is being continuously updated every day, so you can come back and check on it to see how things are progressing.

Personally, I was very surprised to see the number of “Recovered” cases that have been reported. As of this writing, there have been 111,827 total cases and that includes both “Active” cases (currently infected patients) and “Closed” cases (people who have recovered or died). Right now, there are 45,212 active cases (people actually sick right now) which is important to point out because we are typically just quoted the total number of cases and I rarely see any reporting on the 62,722 people that have recovered from the virus. As of today, the total number of deaths worldwide is being reported at 3,893.

This ended up being quite a bit longer than anticipated and I’ll leave you with some more data. The very helpful chart below shows the history of epidemics and the stock market performance. I find that a little historical perspective helps me stay centered when going through these difficult and volatile periods.

Epidemics and Stock Market Performance*

There are many factors that can impact stock market returns, but one concern of investors today is how the stock market will be impacted by a major epidemic or outbreak. Below we look at the historical performance of the S&P 500 Index during several epidemics over the past 40 years. We believe looking at the market’s overall resiliency through several major epidemics can give us perspective on the benefits of investing for the long-term.

I hope these thoughts and reminders are helpful and please don’t hesitate to get in touch with me or my team if you’d like to discuss this further or find time for a meeting. As a reminder, you can use this link to schedule an appointment for a phone call or meeting.

Todd M. Wike, CFP®
Managing Partner, Potomac Financial Group
2018 RJFS Chairman’s Council Member**


*Source: Bloomberg, as of 2/24/20. Month end numbers were used for the 6- and 12-month % change. *12-month data is not available for the June 2019 measles. Past performance is no guarantee of future results. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. and Potomac Financial Group. Potomac Financial Group is not a registered broker/dealer and is independent of Raymond James Financial Services. Raymond James is not affiliated with and does not endorse the services or opinions of the various podcasts or applications discussed in this material. **Chairman’s Council Membership is based on prior fiscal year production. Re-qualification is required annually.