While we have yet to reach the levels of volatility experienced in 2018, we did want to let you know that we are closely monitoring markets and our clients' portfolios. We also wanted to share some of the information we are considering.
First and foremost, concerns about health-related issues are always serious and any human suffering should not be taken lightly. Our thoughts and wishes are for everyone to remain healthy and well.
Related to investing, we have seen markets decline sharply along with mounting coronavirus cases across the globe (China, South Korea, Italy). For example, the S&P 500 has fallen over 11.6% through Thursday’s close since setting record highs on February 19th (Source: WSJ, Factset). Similarly, on the bond side, 10-year Treasury yields have dropped from 1.92% at 2019 year-end to 1.24% at the close on 2/27.
Is this time different?
Markets have experienced many shocks before, including ones that were health-related. Historically, public stock markets have recovered quickly from losses spurred by past global outbreaks. For instance, the 2009 Swine Flu pandemic affected between 10 and 200 million people, leading to between 105,000 and 396,000 fatalities. Yet, one year after the pandemic began, the global stock market had gained nearly 70%. Less-severe outbreaks, like SARS in 2002/2003 and Bird Flu in 2013/2014, also experienced gains of 20-30% within a year of the first diagnosed cases. This all happened even though the global response paled in comparison to what we are seeing today.
And, while we can't predict the full impact of this outbreak on the market, the market decline thus far is still within the average range of what we've historically seen within a calendar year. In fact, since 1950, the average intra-year peak-to-trough drawdown in the S&P 500 is -13.4%. In other words, while we haven’t experienced much of it in the last decade, volatility is normal.
What should investors do?
If you have a diversified portfolio of stocks, bonds and cash, likely nothing. We've learned that "staying put" has often been the most prudent way to weather investment storms, especially those that are driven by uncertainty and magnified by short-sellers. Against this present backdrop, the urge to sell stocks and seek safe harbor bonds and/or cash is certainly understandable. However, making short-term investment decisions based on emotion is likely to be a mistake in the long run.
We obviously can’t give specific advice without understanding everyone’s situation but if you have an investment policy statement that sets long-term targets for stocks, bonds, and cash, stick to it.
Also, remember that emotional headlines are nothing new and will remain. And, when the market is down, one thing is sure to skyrocket: emotional sales presentations of so-called “down-side protection” products. Be careful.When should you take action?
If you don’t have a diversified plan that is anchored on an Investment Policy Statement, get one.
At CogentBlue, we work with clients to help set long-term investment goals, and establish risk, liquidity, and asset allocation targets designed to meet these objectives before we invest. It’s been our experience that having written goals prior to investing makes it easier to stick to a plan versus letting emotion or the competition of the market take over.
In short, while the virus is scary, the pace of the epidemiological response and the well-established pattern of markets recovering from past news-driven shocks means that we remain, for now, steadfast in our positions. With calm and optimism, we believe that this storm too will pass.
As always, please don't hesitate to reach out if you would like to talk further about this or anything else. I’m always eager to talk with you.
All the best,
Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. This information is provided for educational and informational purposes only and is not to be considered advice. Information is derived from sources which are believed to be reliable, but are not independently audited. Views and opinions are subject to change at any time based on market and other conditions.