Hi everyone,
The risk du jour is the novel Coronavirus. The human death toll should not be minimized here, but our job is to put things in perspective. We say this quite a bit during our blog posts, but just to reiterate. We do not know what is going to happen next. We are not virologists, immunologists, epidemiologists, or any other kind of ologists. Our job is provide a mix of mostly stocks and bonds to give everyone the greatest opportunity to ride out downturns as well as take advantage of the stock market’s compound growth (per unit of individual risk).
These posts are designed to look to the past as our guide and try and take emotion out of the decisions we use to make sure that your financial life remains on track. For a little perspective, the S&P 500 is now back to the same price it was on December 5th, 2019. That’s 82 days ago. What’s changed in the last 82 days is our confidence in the future path of the market (sentiment). Letting price be our guide, rather than emotion, let’s take a look at how history can offer us several guides.
1. According to Bespoke, since March 2009, there have been 18 different instances of a 2% decline on a Monday. On average, the return over the next week has been 3.16% (there has been a positive return 17/18 times), and over the next month has been 6.08% (positive returns 17/18 times).
2. According to a recent article, when looking back at the past 20 years, previous epidemics like SARS in 2003 and the Ebola scare in 2014, caused the S&P 500 to decline between 6% and 13% over varying lengths of time. At the time of writing this post, the S&P 500 is already down 8.1% from its all-time high last week.
3. Since 1990, the S&P 500 has had 260 days in which the daily return has been below 2%. That means, on average, there are about 9 per year. What the coronavirus has done over the past week has concentrated these moves over a short period of time, which is adding to some of the fear.
Let’s get a few other things out of the way. Yes, it’s possible that it’s different this time. Yes, none of the other recent global pandemics have been as deadly, this quickly (in terms of human toll). Yes, none of the other cases have the potential to affect global supply chains and threaten the “just-in-time” nature of the global economy.
All we can do is report the news. The two outcomes, in aggregate, are very simple. This gets better, or it gets worse. The CDC came out yesterday and told the market that the US should prepare for a “not if, but when” scenario for some type of event here in the US (there are some rumblings of Long Island having potential cases). This has already been priced into the stock market. While I don’t have a crystal ball, and I can’t imagine a piece of information that would come out in the next week to make all of this go away, I do believe that we are closer to the end of this short-term decline than the beginning.
For our younger clients, those of you who have not made your 2019 or 2020 IRA contributions, those dollars being put to work at 8% better prices will bear themselves out over 20-30 years. For those of you no longer in the accumulation phase of your financial life, make sure your tray tables and seats are in the upright position. The good news is that fear re-entering the market sows the seeds for the next advance and without risk, there is no reward.
– Adam