There’s Power In Uncertainty – Visionary Wealth Advisors

There’s Power In Uncertainty

John Fischer, CFA®, CFP® | Chief Investment Officer
March 17, 2020

Having worked in a restaurant for 10 years, I have a keen interest in the behaviors of the wait staff when dining out. When at a restaurant, I generally like to ask the wait staff what they like or what’s popular on the menu. But my favorite question to ask is actually what’s not good on the menu or what should I avoid? Generally speaking, on a broad menu everything can’t be amazing or even good. So if the wait staff tells me that the entire menu is good, I know that’s likely a fib. And if they’re fibbing about what’s not good, how can I know they’re not fibbing about what is actually good? Where does the line of truth begin and end?

I’ve taken this learning tool and applied it to other aspects of my life. The investing experts I have come to respect the most are the ones who are open and honest about what they don’t know about the markets or about what will happen next. Their lack of “having all the answers” actually raises their credibility because if they have the humility and self-awareness to tell me what they don’t know, then I have an increased level of confidence in the credibility of what they DO know.

In light of the significant effects of the coronavirus on individuals and economies worldwide, let’s discuss some of the most pressing topics on investors’ minds right now and share both what we do and don’t know at this point.

Over the weekend, the Federal Reserve cut its key interest rate by 1% to a range of 0% – 0.25%. The Fed also plans to buy $500 billion in Treasuries and $200 billion in mortgage backed securities, among several other measures to support the U.S. economy and financial markets.

What We Don’t Know: Will the latest actions by the Fed be enough to stem the fear and panic in the financial markets? With yesterday’s losses amounting to the largest one day decline since Black Monday in 1987, the immediate response from investors was that the Fed’s actions won’t be enough to quell investor fear. But was that the Fed’s intended goal?

What We Do Know: The Fed rate cuts will not reduce the spread of the Coronavirus and its effect to our economy. Chairman Powell acknowledged that the rate cuts would not have an immediate impact on the economy but would support the rebound in activity on the other side of this pandemic. More importantly, the Fed’s actions sent a message to the market that it is willing to use all of the ammunition at its disposal to support the smooth functioning of financial markets. While the Fed has more bullets in its holster, market action today may be signaling investor demand for fiscal stimulus in the form of tax cuts or government spending.

Stocks are down more than 25% from their all-time highs in February, how far will they fall?

What We Don’t Know: No one can know with any level of certainty how far markets will decline. Predicting whether markets will go up or down and by how much is impossible to predict especially when no one knows how deeply this pandemic will affect our economy. At this point, there is much we don’t know in terms of how many Americans will contract the virus, if we have enough resources to test and treat patients, how long we will have to engage in social distancing, and how long this pandemic will affect our economy. Without answers to these questions (which no one has), the bottom cannot be known with certainty.

What We Do Know: Despite the current pain felt by investors, historically virus outbreaks such as the coronavirus have had a short-term effect on the economy and market returns. This link shows that S&P performance 6 & 12 months following the end of 12 past epidemics is positive an overwhelmingly majority of the time. Here’s another article that illustrates that past epidemics have resulted in “V-shaped” economic recoveries – or quick drawdowns followed by quick recoveries. Past epidemics have also shown a surge in economic activity after they ran their course as consumers and businesses unleashed pent-up demand for goods and services.

If we look to China, we have some very preliminary results that offer reason for optimism. The number of Coronovirus cases in China surged in the month of January. The first death from the virus in China was announced on January 11th and soon thereafter the Chinese market tumbled versus the S&P 500 (see table below) as the virus spread. But since the beginning of February, the growth rate of the Cronovirus has significantly declined in China. Additionally, reports have indicated that the Chinese economy is returning to a more normal state with factories opening back up and people traveling again. It’s likely no coincidence that the Chinese stock market has significantly outperformed the S&P 500 since the beginning of February when the virus growth rate declined and the growth rate in the U.S. (and other countries) started to increase. While the U.S. timeline is likely to vary from China, this data offers hope that this pandemic will in fact be short-lived and that our economy and stock market will get back on its feet once the virus’s growth rate declines.   

 

Returns (Jan 17-31)

Returns (Feb 3 – Mar 15)

MSCI China ETF (MCHI)

-8.86%

-5.01%

S&P 500 Index

-2.71%

-15.69%

Source: Morningstar

Is this current situation 2008 all over again?

What We Don’t Know: During the Great Recession of 2008, the S&P 500 fell more than 50% over a 17-month period. Many banks, including several prominent ones, went bankrupt. The country’s financial system was on the brink of failure. Given the short-term nature of epidemics, it’s highly debatable if we will even experience a recession as defined by 2 consecutive quarters of negative GDP growth. Without knowing the depth or longevity of this virus outbreak, we can’t be certain of its economic effects but there are reasons to be confident that this situation is not a repeat of 2008.

What We Do Know:  Based on past epidemics, it’s extremely unlikely the duration of this bear market resembles that of 2008. Furthermore, banks are much better capitalized and economic fundamentals are much more supportive today than 2008 as we have a 50 year low in unemployment, record low interest rates, high savings rates, and a 30 year low in household debt payments as a percentage of household income. The banking sector, the consumer, and the economy are all in a much better starting position to weather the current storm as compared to 2008.

Given the rapid sell-off in stocks, is this a buying opportunity?

What We Don’t Know: Given the sharp equity decline since the market hit new highs on February 19th, valuations look much more attractive than they were a month ago. But while now may be a good buying opportunity for the long-term investor, what we don’t know is how long this current decline will last and if and how many better buying opportunities will arise.

What We Do Know:  Before considering buying opportunities, we would encourage investors to make sure they own the right balance of stocks and bonds for their time horizon and risk tolerance. We would also advise to check if your portfolio needs to be rebalanced given the strong market movements.

Some investors will be keeping a close eye on the growth rate of the virus in the U.S. and waiting for it to peak as a buy signal or a signal of a market bottom. We would caution any investors from trying to time the market bottom. Trying to buy at the absolute bottom is an unrealistic goal – perfection is the enemy of good. The goal is to purchase investments at prices at which you’re likely to be happy to own it in five or ten years. If you have money to invest, consider investing in increments over time.

This may be the buying opportunity of the decade on the debt side of your balance sheet. Given the historical low interest rates, now’s a great time to “buy” a lower mortgage rate, home equity line rate, student loan rate, or credit card rate by re-financing. Stock market losses will likely be recouped over time but locking in lower borrowing rates can create guaranteed savings for the life of your loan.

Above all else, investors can give themselves the best chance of successfully navigating these challenging times by asking the right questions. Avoid asking the questions for which no one can answer with certainty such as how far will stocks fall or when will this end? Instead, ask the questions that matter most to you – does my plan created to achieve my financial goals still work? Was my plan built to withstand these types of market drops that happen from time to time? Do I own the right balance of stocks and bonds in a diversified manner to remain invested even during these volatile market periods? By asking the right questions, investors can take back control from the uncertainty of the markets, reign in their emotions, and focus on the strategies that help long-term investors stay the course during uncertain times.

 

Disclosure: This “Update” is provided for informational purposes only. It should not be construed as personalized investment, tax or legal advice, including the recommendation to engage in a particular investment strategy. Past performances referenced in the Update may not be indicative of future results and may have been impacted by events and economic conditions that will not occur or prevail in the future. No investment strategy can guarantee a profit or protect against a loss in periods of declining values. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those undertaken or recommended by Visionary Wealth Advisors, will be profitable or equal any historical performance level(s).  Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Investing involves the risk of loss and investors should be prepared to bear potential losses, including the full amount invested.