Investment Commentary | Writing a New History
March 25, 2020
As of this past weekend, more than 300,000 cases of coronavirus (COVID-19) have been confirmed globally. Starting in the middle of January, it took 52 days to record the first 100,000 cases. The next 100,000 were confirmed 12 days later, and the final third only four days after that. As of this week we have surpassed 400,000 confirmed cases. The COVID-19 pandemic has impacted the United States very quickly and in totality. Employees are forced to set up makeshift home offices, restaurants are offering curb-side pickup, and everything from college courses to real estate open houses is being done virtually. Most Americans have never experienced anything like this, and everyone is learning to adapt.
The Federal Reserve is also pulling out all the stops in order to keep the markets functioning and mitigate the economic impact of COVID-19. On Monday, Federal Reserve Chairman Jerome Powell announced another, larger measure to continue to stimulate the economy through monetary policy. The Fed announced unlimited purchases of Treasuries and mortgage-backed securities (MBS), up from the previous $700 billion cap. This action will provide additional liquidity to the Treasury market and comes after a number of other liquidity-boosting measures, including two interest rate cuts, most recently to near zero percent. Last night the Senate passed a package worth more than $2 trillion to help individuals as well as small and large businesses with the economic impact of the outbreak. This bill still needs to pass the House, which may take days.
It is clear that this is a unique time, and while it’s difficult to compare historically, we can learn some lessons from prior bear markets. The S&P 500’s largest percentage gain days tend to occur in clusters during the worst of times for investors. Yesterday, the Dow Jones Industrial Average rallied more than 11% on news of the economic stimulus package making its way through Congress. Looking at data going back to 1930, Bank of America reports that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, whereas the return for investors who held steady through the peaks and troughs would be 14,962%.
While these cautionary facts offer important perspective and remind investors to remain level-headed, they don’t mention that these generally reflect buy and hold strategies rather than active portfolio management. Rebalancing portfolios along the way to manage risk and provide the capacity to add risk in the case of a large decline can help. Of course, it is most difficult to discern when the market will turn. The cautionary note when removing the 10 best days, then, is that reducing equity dramatically creates the need for another very difficult decision: when to reinvest.
Historically, markets tend to bottom before economies bottom. While it is impossible to predict the trough during this drawdown, we don’t advise wholesale selling. The stimulus package provides evidence that the economic downturn may be mitigated and some reason to begin adding to equities. However, this does not mean we haven’t been active in client portfolios along the way. Examples of recent moves include creating tax benefit by harvesting losses, changing the style of investment management in equities to one that will benefit from an economic upturn down the road, and reducing our interest rate risk.
During these uncertain times, one thing is for certain—every bear market in history has led to new all-time highs at some point in the future. Understanding your time horizon and having the perspective to see this come to fruition is a planning question. A well-thought-out financial plan incorporates the need for liquidity before the pandemic or other unforeseen event. In other words, diversification means that most investment portfolios are not invested in 100% stocks due to unique circumstances such as time horizon and liquidity needs. The minimum investment horizon for stocks is five years to avoid the need to sell low because you have to.
Your advisors are here to help you manage the emotion during these ambiguous times and stay focused on a disciplined financial plan and investment process. While this uncertainty can be difficult, we will gather strength together and emerge with a new precedent.
This Coverage Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2020 Zywave, Inc. All rights reserved.