The coronavirus epidemic has sent shockwaves through the American economy, as many investors already know. Still, with a little economic sense, investors should be able to maintain long term confidence in their portfolios and in the market. The United States economy was due for a recession; since 2009, the economy has rebounded to the tune of 121 consecutive months of GDP growth, a national record. With such large expansion, however, must come an eventual downfall (due to market overvaluation, inflationary output gaps, etc.). It has been nearly 11 years since the last recession in the United States. Recessions, on average, occur every 5 to 6 years. Long story short, a recession was on the horizon. The coronavirus epidemic caused the recession through fear. Consumer expenditures, based on popular economic belief, make up approximately 70% of total economic expenditures. When consumers are faced with outside influences, such as fear imposed by a deadly virus, spending habits change, and the economy is forced to shift accordingly. In the case of the coronavirus, fear decreased consumer expenditures. People are afraid to go out in public to eat, shop, etc. With the decrease in consumer expenditure, the economy was done in. However, the bright side of the economy’s current standing is this: the cause is known. In the 2008 financial crisis, the cause was not so easily identifiable. Some economists blamed it on market overvaluation while others blamed consumer confidence and the housing market. Knowing the problem makes finding a solution infinitely easier. The FED has already moved to halt the onset of a recession; similar action from the FED took much longer in the 2008 financial crisis. Ultimately, there is no system malfunction that is causing the current economic decline. The culprit is an outside invader, a virus that will be beaten by the United States medical system. Once the virus is gone, consumer confidence will return, and the economy will surge once again.
As COVID-19 takes hold of the world, investors need only remember one thing: patience is a virtue. The stock market will rebound; it always does. And portfolios will gain back their value after the recent bear market. Michael Wilson, Morgan Stanley’s chief US equity strategist, believes that the stock market will begin to recoup value in the near future and urges people to jump into the market. With cheap prices and nowhere but up to go, the stock market is primed for a rebound. With an influx of new investors, prices could begin to rise again in the near future. For investors who have lost large percentages of their portfolio value, now is not the time to sell. Remain patient and wait until the market upticks again, and maybe even look into investing more while the COVID-19 has prices so low.
The Bear Market is here. On Wednesday, March 11th, the DOW closed in Bear market territory. The S&P 500 is not far behind. This is defined as a decline of more than 20% from the peak. So, where do we go from here? What will happen to the economy and the market as we deal with the Coronavirus (COVID-19), an upcoming Presidential election, Brexit, and plummeting oil prices?
The quick answer is that nobody knows for sure on any of the above. Here is what we do know. We know that economies around the globe, including the U.S. will slow due to the fears surrounding COVID-19. Fewer people will travel, dine out, attend sporting events, and in general consume. This will inevitably cause consumer spending to slow, which will impact company revenues and earnings. Oil has dropped to nearly $30 per barrel as the demand will contract as fewer people fly and drive. But for how long?
If you cancel your spring break trip, will you not go later in the summer? If you don’t go to Lowe’s this weekend to buy a grill for the season, isn’t it probable that you will eventually buy one? Your demand and desire for traveling, a grill, and the latest tech gadget is still there, but the logistics of attaining those items has become complicated.
The initial drop in consumer demand will impact the economy in the near term. It is possible that we enter a recession in the U.S. over the next few months. It is important to remember that an average recession lasts 9 months and we have not had one for almost 11 years. They typically occur every five years, so we are overdue.
As for the market, equities have pulled back in very quick fashion in anticipation of this economic slowdown and recession in earnings that will inherently arrive. The average contraction for the S&P 500 is around 30% leading up to an economic recession. Therefore, given the already realized 20% pullback, it is possible that a good portion of the correction has already occurred.
If you have been to our office for a meeting in the last 4-6 months, you are aware that we have been warning clients that a pullback in the market was inevitable given valuations. In fact, we spent a lot of time in 2019 trying to reduce risk in the portfolio. We shifted to a more conservative bond allocation and we changed some of our equity allocation. So far, the changes have been effective in minimizing the downside correction that we are experiencing. We are still long-term investors and believe in ignoring the short-term market fluctuations. We don’t know what the next few weeks will bring for the markets, but we know that a diversified portfolio is the best way for clients to stay ahead of inflation, while minimizing risk, over the long-term.
The average investor has earned a 1.9% annualized return over the last 20-years. A 60% Equity 40% Bond portfolio has earned 5.2%. The average investor makes emotional decisions leading them to buy and sell at the wrong time. Keep the focus on making sure that your investment allocation is in line with your financial plan, so that you can achieve your long-term goals.
Liz Ann Sonders (Chief Market Strategist for Schwab) said the following in a letter this week to advisors: “Panic is not an investment strategy.” We agree and encourage remaining steadfast in your long-term strategy with a diversified portfolio.
Galecki Financial Management Investment Committee
The recent wave of fear surrounding the Coronavirus had led to the lowest all time average rate for 30 year fixed mortgages this week (at 3.29%). With the cratering of the mortgage rate, talks of refinancing mortgages have sparked among the masses of homeowners in America. According to data from Black Knight, Americans stood to save an average of $268 monthly if they were to refinance their mortgage with the current mortgage rates. Given the circumstances, many experts encourage homeowners to explore refinancing their mortgages. Still, refinancing at the current mortgage rate is not a full proof plan to save money. Refinancing can cost thousands of dollars in fees, and taking on too steep of a monthly payment could prove to be a disaster when the economy is as unpredictable as it is now. People should make sure to seek professional financial help to ensure their financial betterment and safety. Still, with the right help, refinancing a mortgage can save thousands of dollars for a homeowner.
To the majority of Americans, investment is a familiar term. People see investment as a means to an end, but they might be missing out on the idea of investment and why it is beneficial. Many Americans see investment as a fast track to retire early, or to retire in a sound financial position, but it can be much more than that. For example, investing can be used to achieve other financial goals such as paying off a house or car mortgage; investment is not just used to build up retirement accounts. Also, investing allows people to become part of new ventures in the economy. When new, cutting edge companies are founded, they need capital to invest. This allows people willing to invest the opportunity to become part of a venture that is much larger than themselves. Investment also allows people to set a financial foundation for the next generation. By investing, establishing a portfolio, and building up financial stability, parents can help ensure the financial stability of their children.