Thoughts on Current Market Volatility

Markets

March 2, 2020
Markets

We want to take a moment to update you on our thoughts related to the coronavirus and its impact on the financial markets and your personal financial situation.

Last week U.S. stocks fell sharply. The Dow Jones Industrial Average tumbled 12.4%, a drop of more than 3,500 points. The broader S&P 500 Index suffered an 11.5% decline. It was the Dow’s worst month since 2009. This drop has been swift and wide. All the S&P 500’s sectors have fallen into negative territory year-to-date.

It’s not only the amount of the decline that is causing investor unrest. It’s also its speed. According to The Wall Street Journal, last week’s 10%-plus drop occurred over the fewest sessions – six – of any correction over the past four decades. (A decline of 10% or more is typically defined as a correction.)

Entering this New Year, many stock markets around the world were trading near all-time highs. For example, major indexes in the U.S., Canada, the U.K., and Australia fell into this category. In fact, since The Great Recession’s end in 2009, many stock markets around the world have doubled or tripled in price. In the U.S., the S&P 500 index, a broad measure of the stock market, saw its price increase from under 700 in March 2009 to over 3,300 in February, according to data from Yahoo! Finance.

Of course, markets don’t go up forever. Sometimes, they just flatline for a while as company earnings catch up with stock price valuations. Other times, they see violent drops that make big headlines, like the “Black Monday” stock market crash on October 19, 1987, that was felt around the world.

When the stock market tumbles a few days consecutively, we often feel the need to do something. We seek explanations and want to consult crystal balls. While coronavirus’ spread has been a catalyst, we do not know for sure why the market moved the way it did. In addition, nobody knows how the virus will affect the U.S. It is uncertain whether the outbreak’s short-term impact will reduce long-term profits.

Top investor Warren Buffett famously wrote, “It's only when the tide goes out that you learn who's been swimming naked.” Well, the tide is going out. The good news is, as stewards of your financial well-being, we prepare for situations like this even though we never know what may trigger them.

Remember that you are investing for the long term, especially if you are saving for retirement. Even if you have retired, on average, you are investing for another decade or two. You invest in stocks because of the stock market’s long-term track record. Holding a diverse stock portfolio for the long term has tended to generously repay patient investors over six or seven decades of working, saving, and drawing down a portfolio.

Three Keys

Here are three keys we’d like you to keep in mind as we work through the unfolding virus situation and its impact on you and your financial situation.

First, fear is a natural reaction. We’re human. As humans, we’re hardwired to react to situations that threaten us. In this situation, we have a double whammy of fear. There’s the virus that can cause us physical harm, and the market reaction that can cause us financial loss.

Related to the virus, nobody knows how bad the situation will get. All we can do is take appropriate precautions and trust that researchers will find a way to eradicate it sooner rather than later.

By contrast, your reaction to the financial markets is something within your control. We know it’s no fun seeing your portfolio drop. But we also know market volatility is normal and expected. The key is to zoom out and look at the long-term, big picture.

Your investments are designed to support your long-term objectives, not today’s needs. Like farming, we know there will be some lean years when Mother Nature doesn’t cooperate, and others will deliver a bumper crop. The financial markets are similar. Financial markets react to shocks to the system, and we are seeing one now.

In situations like this, our job is to bring perspective, to help you see that swift market drops are not unusual. And yes, the headlines are scary. They can bring our “fear” instincts to the surface. We believe the best approach is to acknowledge what you’re feeling, reach out to us if that would be helpful, and have confidence that we are on top of the situation.  

Second, we are closely following the situation and will make adjustments as warranted. Sometimes, situations like this create opportunities for you. For example, as prices drop, we may have an opportunity to “rebalance” your portfolio and shift your asset allocation. This means we might be able to “sell one thing and buy another” as a way to get your portfolio back to a desired mix that is most appropriate for you.  

Third, be prepared emotionally for more volatility. In today’s financial markets, many trades are triggered automatically by algorithmically driven computers. Once certain “technical levels” are reached, these computers, often run by large hedge funds, start selling (or buying) indiscriminately. And many of them are programmed to “trigger” based on the same technical levels. This “piling on” can lead to very eye-popping volatility—both to the downside and the upside.

And keep in mind that in the long term, markets tend to reflect broader-based economic trends. As investors, the challenge is to not let short-term difficulties prevent us from reaping the potential benefits of sound, long-term investing.

What Happens Next?

The honest answer is we do not know. But as long-term investors, we remain focused on just that: the long term. Not a quarter or even a year. We mean many years.

Remember that while stocks are volatile in the short term, over the long term, returns are far more positive than negative. We can see this more clearly if we look at the market’s performance over different time frames:

On any given day, it’s a coin toss whether your stocks go up or down. Over a year, the odds improve – two-thirds of the time you’ll win. Stretch that out to three or five or 10 years, and your chances of making money skyrocket. In fact, in almost nine times out of 10 over the past 100 years, stocks make you money over any 10-year period.

In short, businesses grow. Stock prices rise. Over years, not always quarters.

Yes, stocks can fall – sometimes dramatically. Over history, they recover. Past data shows that corrections happen once every 12-to-18 months or so and last four-to-six months. Our last correction happened more than a year ago, so seeing one now is not a shock.

We don’t have a crystal ball telling us stocks won’t go down another 10% from here. That would put us in bear market territory. That could happen – or stocks could rally. According to research from CNBC, we have had 12 bear markets since World War II. On average, these markets have declined more than 30% over 14 months. They have taken 24 months to recover.

We do not know for sure how long a correction or even a bear market will last. We need to remember that to win in the stock market over the long haul, we must be willing to suffer short-term losses. As Warren Buffett warns, “Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater.” But he also says, “We’re buying businesses to own for 20 or 30 years... and we think the 20- and 30-year outlook is not changed by the coronavirus.”

 Here to Help

Your financial well-being is our number one objective. We continue to work hard behind the scenes to monitor this unfolding situation and act as appropriate. If you have any questions about your specific situation, please contact us. We are here to help. Thank you for your continued trust and confidence.

We hope you find the above post valuable. If you would like to talk to us about financial topics including your investments, creating a financial plan, saving for college, or saving for retirement, please complete our contact form. We will be in touch. We can schedule a call, a virtual meeting via Zoom, or a meeting at Apprise Wealth Management's office in Northern Baltimore County.

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