Last week was one of the most volatile in decades reaching levels last seen during the height of the Financial Crisis in 2008. Investors are bracing for another volatile start to the week as they digest more news on the coronavirus and its potential impact on the economy, employees, and companies.
Coronavirus and Oil
There are an infinite number of headlines about the coronavirus including the closure of schools, restrictions on group gatherings, cancellation of sporting events and business conference, and much more. The ripple effect of these and the many other headlines is difficult to calculate but is unquestionably enormous.
The government has taken multiple steps to help ease the impact with 1.) the Federal Reserve most recently cutting interest rates, now for a second time, to near zero, 2.) the House passing a bill to help employees, and 3.) the Treasury taking steps to help ease the cash flow pressure on companies. Investors though are yet to show signs of confidence that these measures will be enough as the markets have now fallen into bear market territory (down more than 20% from their highs).
On top of the coronavirus is a dramatic drop in oil prices that makes a bad situation worse. A feud between the Saudis and Russians over oil production levels resulted in the Saudis’ decision to drastically cut prices resulting in a collapse in oil prices worldwide. This is a major blow to both the U.S. and worldwide economy as many U.S. energy companies cannot be profitable at current prices and many oil dependent countries around the world will be challenged to meet their financial needs.
Selling when the market is down 20% - 30% is simply not a good long-term investment strategy. It may initially provide some emotional relief but what comes next can be tremendously challenging.
Consider an investor who does sell, buying back after prices have fallen further is incredibility difficult…the fear is often too great. Human instinct instead is to wait for it to go back higher. This though often results in misery for the investor as the move back higher can occur rapidly and the regret of now being on the sidelines is overwhelming.
I believe investors must always maintain a long-term focus or should otherwise not be invested in the market. Getting out of the market after it has fallen sharply has simply not proven to be successful for investors.
Perspective on this New Bear Market
This new bear market has come upon us quickly but the volatility and magnitude of losses we’ve seen the last few weeks are not out of line with similar we’ve seen in the past. What has been different about this bear market is that it has been caused by a worldwide pandemic. We have not seen this for more than 100 years. That said, we must remember that every bear market in recent times has been the result of something different…they nearly always are.
The 2000 – 2002 bear market started with stocks having simply gotten too expensive during the late ‘90s but was exacerbated by the unprecedented attacks on 9/11 never seen before on U.S. soil. The 2008 – 2009 financial crisis was driven by a declining housing market unlike we had seen in modern history resulting in the collapse of major financial institutions unlike we had seen since the Depression. Clearly the markets have had to endure unique and unprecedented events.
Bear markets come and go. They always have and I believe always will. The cause of any bear market, like this one, is often different than others in the past and unprecedented in nature. How deep this one gets and how long it lasts is unpredictable but this pandemic’s impact on the markets will pass.
I hope that you find my message to be a repeat of everything you’ve heard from me before sometimes, I suppose, sounding like a broken record. It’s because I believe deeply that it’s the best advice I can provide.
Nothing is ever perfect when investing and nor is any given time period exactly the same as any previous period. Regardless, Super-Diversified portfolios are working with conservative portfolios losing much less value and more growth-oriented portfolios losing more but ALL Super-Diversified portfolios have lost much LESS than the overall market just as designed and expected.
Given that 1.) a bear market was expected at some point, 2.) the market’s performance has been generally similar to other bear markets, and 3.) Super-Diversified portfolios are delivering as expected, I firmly believe it is in every long-term investors best interest to stay the course.
As always, please let me know if you have any questions or comments or how we can be of help.