A series of sleepless nights gives an investment advisor lots of time to read analyses and opinions on the economic and human toll of the accelerating coronavirus.
On a daily basis, all market participants get to digest both 5% daily moves (which are unnerving in their own right) and the conditions that might be precipitating this volatility -- be it rising expectations of a recession, the impact on corporate earnings or the trajectory of reported cases. (Stocks are down 8% today, as I write this.)
Unfortunately, the only "facts" that we can hang on to are the declining share prices of investments that previously served us so well. Everything else is guesswork -- and that is part of the problem. The inability to quantify actual risks causes investors to assume the worst.
A HISTORICAL PERSPECTIVE
Having started my career in the summer of 1987, my first experience with severe volatility was a 20%+ crash, seemingly out of the blue, on October 19. Around me, I saw respected professionals selling shares for their clients' accounts with the logic that "stock market declines forecast a coming recession." When stocks are down 22% in a day, a recession has already been factored into share prices. Those turned out to be bad decisions.
After the financial crisis of 2008-09, clients remained fearful. One client was adamant about not putting money back into stocks. So, I tried an exercise with her. "Are there any companies that you think will be fine, and will survive this Great Recession?" I asked. "How about Coca Cola?" She agreed that Coke would likely survive, and her mood shifted perceptibly from fear to a bit of greed.
She wanted to try the exercise again,with another stock. Her portfolio has more than doubled since that date.
IS THIS A PERMANENT LOSS?
How far into the decline have we traveled before the bad news has been discounted? No one can tell. We just don't know how bad the news can get. The US is not yet broadly testing people for the coronavirus, so we are destined to see the numbers of cases skyrocket. That bad news has yet to be digested by investors, and their lack of confidence in the government's response is continuing to be a pressure source on stocks. This will get worse before it gets better.
Important in all this is a big question: Are these conditions likely to result in a permanent loss of capital from your portfolio, or is it likely that over time this will prove to be a short-to-intermediate term phenomenon. I believe that the latter is more likely, although recovering what has been lost will take time. Today's investors have highly diversified portfolios that make it highly unlikely that any corporate bankruptcy will permanently impair their capital.
THEN, WHY IS IT SCARIER THIS TIME?
Why is this bear market more unnerving than ones that we have experienced before? I have a theory, and it relates to our human nature. This bear market is particularly visceral because it is intertwined with our own mortality. We are talking about more than money. We are talking about life and death. And this discussion about health is not in the abstract, or about some far off land. These conditions are about us, and our families, our parents and our communities.
For my own immediate family, with many immuno compromised members, this is as close to being in a war zone as I hope to ever experience. Germs can come out of nowhere. Further creating worry is that our health care system doesn't have the excess capacity to treat thousands of patients needing intensive care and respirators. These concerns, and the ever rising need for vigilance and new protocols, is exhausting. People around the world are experiencing this, even before the death tolls start to rise.
So, it's not surprising that we are unnerved by this particular bear. It has taken more from us than money. It is threatening our health and our sanity.
THE ALTERNATIVE TO EMOTION
That's precisely when we need to be vigilant ourselves, and not succumb to emotion. We need to use history as our guide: With proper monitoring and isolation, viruses can eventually be brought under control. A vaccine is a real possibility within 12-18 months. And bear markets eventually end, and well-capitalized companies survive downturns. In the meantime, re-balancing back into equities can add to future returns.
What are we doing now. Given that we expect continued volatility, we are swapping some stock and equity mutual fund positions for "hedged" or "buffered" vehicles. We did this before and will add to these positions. They are constructed to have less downside participation -- but the offset is that the also have less upside to a market rebound. We will also be looking for select opportunities to take advantage of as the dust clears.
As always, we encourage you to reach out to us if you'd like to discuss this and how it pertains to your personal situation. We understand how difficult this is for everyone involved, advisors and investors alike.