Q1 2020 PastCast: Crazy Weather We’re Having?!
Here’s all you need to know. (If you’re in a rush.)
Coronavirus put an end to the bull market. – The longest period of uninterrupted US stock market gains (w/o a single 20% or more decline), ended VERY abruptly in March, thanks to the coronavirus pandemic.
Stocks fell over 30% – The end of February and March saw the fastest retreat of 20% or more from all-time highs, for US stocks, in history. From all-time highs on 2/19, to recent lows on 3/20, US stocks fell over 30%.
Banks cut interest rates. – In order to stabilize financial markets, central banks around the world made several emergency interest rate cuts. These cuts arguably failed to stabilize markets in the short-term, as March was one of the most volatile periods in history for global stocks.
We’re in a recession. – Consensus seems to be that we have already entered a relatively severe, but hopefully short-lived recession, as the economy has come to a self-imposed halt and recent weekly unemployment claims appear more like typos than reality, destroying previous records by the millions.
Relief is on the way. – Governments around the world have enacted fiscal stimulus programs intended to provide short-term financial relief to the vast majority of workers that have been asked to isolate at home, in order to slow the spread of the virus.
This WILL end. – And financial markets tend to recover well ahead of the actual economy.
And now for the long(er) version…
Things have changed…to say the least
Just three months ago, B.C. (Before Coronavirus), we were recapping one of the best decades in history to be an investor. But the longest period of uninterrupted US stock market gains in history, which began in March 2009, came to an abrupt end about a month ago. The first quarter of 2020 was as dark and stormy as it gets when it comes to weather metaphors. And the world has changed so much in the last month alone that there really isn’t much else to focus on in this PastCast than the current crisis we’re all in together.
You’d have to be living a pretty isolated life to have missed just how much the world has changed in the last couple months. But then again, and somewhat ironically, that is exactly what we’re all being asked to do these days thanks to the coronavirus. To say our lives have all changed dramatically would be quite an understatement.
We’re dealing with an economic, financial, and societal shock unlike any of us have been through before. It’s impossible for us to address the current situation we’re in without recognizing that your investments are unlikely to be your greatest concern at the moment.
We know that the health of yourself, your family, and your community are your priorities right now. So while we know that this is a scary, uncertain time, we hope at the very least, that our insights here provide you with some perspective that can help you stay focused on those things that matter most in your life right now, without stressing about the stock market and your retirement accounts, while we fight through this pandemic. So let’s start by answering a few key questions…
Why did the stock market crash?
The stock market hates nothing more than uncertainty. A global pandemic unlike most investors alive today have ever experienced, brought with it maximum uncertainty. At a time when stocks had been sitting at the highest levels of all time, any unexpected disaster or bad news event was likely to become the catalyst for a sell-off. However, while contagious disease experts around the world have been preparing for an event like this as an eventuality, American businesses, local governments, and the federal government were not prepared for the public health and economic implications of a widespread, highly contagious, deadly virus.
As panic and confusion set in, businesses began to shut down and states began to close schools and order residents to stay home from virtually all group activities, including work for many of those on the front lines of this battle.
The realization that we would need to intentionally shut down our economy for the greater good of public health meant small business and corporate earnings would suffer tremendously until we have made it through this, and some businesses in industries like travel, retail, and restaurants for instance, may not make it through to the other side at all.
Months of little to no revenue and expected lower earnings revisions across nearly all sectors of the economy means companies are suddenly worth significantly less in the minds of investors, in the near term. When you combine that very simple fundamental aspect of stock valuation with the emotional panic of unprecedented uncertainty ahead, you had the perfect recipe for a bloodbath in the stock market. But history has always rewarded the investors that stay the course in these moments. We have no reason to believe this time will be any different.
What has been done to try to prevent a prolonged recession, or worse?
Although we cannot officially identify a recession until we’ve actually seen several consecutive quarters of negative economic growth, virtually all economists agree that we have entered into a deep recession. Unemployment numbers that dwarf previous weekly records and a forced shutdown of a significant portion of all economic activity would strongly indicate that.
Both the Federal Reserve and the Federal Government have stepped in with monetary and fiscal measures to mitigate the damage and hopefully shorten the duration of this recession. They’ve done this by slashing interest rates to near 0%, making it easier for both individuals and businesses to borrow and lend money, and passing $2 trillion stimulus legislation to help businesses and workers negatively impacted by this economic shutdown. It is yet to be seen whether these early steps will be enough to make this recession a brief one. But that is certainly the goal.
Curious how the stimulus bill could impact you and/or your family? We have a new calculator to help!
How is this different from 2008 and other historical crashes?
It’s been a while since we’ve seen declines like this in the stock market. For many it may be the first time in your career that you’re experiencing big declines in your investment accounts.
Looking back throughout history, we see that every crash has ended with the same result – a full and sometimes very quick recovery for the stock market, and an eventual overall recovery for the economy as well.
Yet, every crash has happened for a very unique reason. This time is certainly no exception. But perhaps what makes this particular crisis the most unique is that the financial impact is a direct result of a self-imposed global economic slowdown, the purpose of which is to flatten the curve, save lives, and thereby also shorten the ultimate economic impact around the globe.
This downturn has a very clear and intentional reason as its catalyst. Perhaps we can take some comfort in knowing that it has an end. There are very clear and achievable goals (like developing a vaccine and safe treatments) based in science and public health that simply take time. This is not the Apocalypse.
What can the past possibly teach us about something unique like this?
Every crash is unique. And every crash leads to a large portion of the population being convinced that this time the result will also be different. But perspective helps here. We like to remind our clients that in the moment, every crisis feels worse than ever before in some way, especially on a more personal level, but when it comes to the broader economy and the stock market, which is how this ultimately relates to your investments, we see no reason to believe we won’t overcome this, as we always have.
Keep in mind that we have not only seen pandemics before (however rare), but we have also seen an endless number of other periods of great fear and uncertainty, like the Great Depression, two World Wars, various other wars, terrorist attacks, political scandals, financial bubbles, and even what seemed at the time to be imminent and complete nuclear annihilation at several moments during the Cold War. And yet, while the stock market has generally always reacted negatively to the uncertainty of the short-term, it has recovered fully and marched to new highs EVERY. SINGLE. TIME. With a 100% track record.
You’re likely to hear a lot of comparisons right now to one of the darkest economic periods in American history, the Great Depression. While it’s true that the immediate severity of this recession could mirror or even surpass that of the 1930s, this is a completely different situation. Programs like unemployment insurance and social security didn’t even exist yet, and our Federal Reserve was actually making things harder on people and businesses by RAISING interest rates – the opposite of how monetary policy is supposed to be used to stimulate the economy. While the immediate response on the public health side of this crisis will be debated for decades to come, our government seems united for a change and quick to act with both fiscal and monetary policy solutions that should reduce the duration of this downturn. And again, this was all self-imposed.
This particular situation has challenged the wills and discipline of even the most experienced and successful investors. But if you are convinced that this will be the first time in history that we are truly unable to overcome a crisis, your retirement accounts probably should be the very least of your concerns right now.
What can I do right now to ease the pain on my retirement investments?
As a general rule, our advice is to never make emotional, short-term reactionary decisions with your long-term investments. Doing so is not a winning strategy and it is actually one of the worst mistakes investors can ever make. Uncertain times can make anyone feel like they have no control, and making changes to your investments is the natural reaction that can ease the pain by giving you back some control. But while that immediate feeling of comfort can ease the pain in the moment, it almost always comes at a much higher long-term cost.
Given that every single downturn in history has actually proven to be an opportunity for patient, disciplined long-term investors, the best thing you can do is stay focused on the strategy you have in place that should be built with the understanding that these downturns do, and will continue to happen, between now and when you retire. And in fact, they are the very reason that patient investors are rewarded over time for staying the course.
The further you are from retirement, the more aggressive your approach should probably be, but that means even more pain in moments like this. But it’s often said that volatility is the price investors pay in order to participate in the long-term gains of the stock market. That painful, but temporary feeling of loss, has historically been rewarded with gains over the long-term, and that is the point, no matter how hard of a pill that may be to swallow in the moment.
If you’re closer to retirement, your portfolio should consist of investments other than stocks, like bonds and even cash or cash equivalents. The very purpose of this is to prepare you for moments like this. By including non-stock investments in your portfolio, you are isolating a portion of your portfolio from the short-term unpredictable ups and downs of stocks. And ideally you will have enough in this more conservative portion of your portfolio to provide you with stability or even income if you are to reach retirement before your overall balance has had a chance to recover.
At the end of the day, this is your money and if you are feeling overly stressed you likely need a better understanding of your strategy. That is what blooom’s team of advisors is here for. And you may also be realizing now that you are not comfortable with the level of risk you’re taking. That is ok too. Now may be a time to reassess your risk tolerance within your blooom profile. Just as long as you know that changes to your risk tolerance that coincide with market crashes can become a dangerous and detrimental habit.
The sun WILL come out again…but maybe not tomorrow
This too shall pass. The news is already beginning to turn more positive as there is hope for some successful treatments, vaccines, and strict policies put in place by governments around the world are beginning to prove effective in flattening the curve. The death toll is already tragic and will continue to get worse in the coming weeks. Many of us will either know someone directly impacted by the loss of a family member, be infected ourselves, or at least have someone close to us infected, before this is all over. But one thing we can all be certain of is that we have the greatest minds on the planet working night and day to find effective treatments and vaccines.
The financial and economic toll will likely be enormous over the next few months and maybe longer, but attempting to guess how and when the stock market is going to react and eventually recover, is just a recipe for sleepless nights and ultimately a losing battle. We’re here to take on that burden for you and remind you of the time-tested lessons that can help keep you from making mistakes at the worst possible times.
When it comes to your retirement investments, don’t let this distract you from the much bigger picture and draw you into making harmful investment decisions. We may still be in for more of a wild ride from here, but know that there is light at the end of it all. We will get through this. And blooom is in your corner. Lean on us when you need help with your finances. Know that we exist for times just like this. You have enough to worry about right now. Let us help you stay focused on what truly matters most in your life right now. Hang in there and please reach out to us for a conversation if you need it. We’ve got your back!
The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.