Today’s Blog takes a few lessons from history and attempts to allay the market and economic fears aside from the tragic reality and suffering that the Coronavirus is bringing to thousands. To quote Winston Churchill, “Those that fail to learn from history, are condemned to repeat it.” One of the most dangerous phrases may be, “this time it’s different.” To disassociate the news of today from historically similar events allows our fears to persevere over reality. Let’s consider the bleakest economic period in U.S. history, the Great Depression. When Franklin D. Roosevelt held his first inaugural address on March 4, 1933, the country was in the grips of the worst economic downturn ever experienced. In truth, that time it was different, but character and strength are inherent in our species and notably in Americans. FDR spoke to this in his address, as follows: “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself- nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” His efforts to rally a desperate nation were heard and led to one of the most amazing periods in the creation and expansion of infrastructure and industry ever seen in the U.S.
The most surprising facts that I have learned in doing research for today’s message is that the “common flu”, Influenza has been increasingly widespread and deadly, and yet we have learned to live with it. The Centers for Disease Control (CDC) ... “estimates that influenza has resulted in between 9 million – 45 million illnesses, between 140,000- 810,000 hospitalizations and between 12,000- 61,000 deaths annually since 2010.” For 2019, there were an estimated 34,157 deaths from the flu. (www.cdc.gov/flu/about/burden/index.html)
Today’s reaction in the markets is predictable and we have seen scenarios such as these before. Something causes panic in the markets to impact the confidence in a long-running Bull market that many were already losing confidence in. Program trading and fearful investors head for the exits pushing market declines that produce oversold conditions for many fundamentally sound stocks. When good news reenters, the markets rebound producing a V-shape or possibly a U-shape, slightly extended recovery in the markets. We will certainly see a decline in global GDP with certain industries such as travel and leisure taking the brunt of the market’s impact. According to a recent note to the clients of Oxford Economics from their lead economist, if the pandemic goes global, economic growth will fall in the first half to nearly zero, and the U.S. and euro zone would enter “technical recessions”. That would shave 1.3% of 2020 global growth from its baseline forecast of 2.3% growth, but the recovery would be swift and global GDP would still be on track for its baseline 2021 estimated global growth.
Scenarios are being modeled and are based on what happened in past outbreaks such as SARS, “bird flu”, “swine flu”, MERS and Ebola. Many epidemiologists and virologists are in large agreement that this virus appears considerably less lethal than either SARS or MERS. Looking further back in history the Spanish Flu of 1918 infected about 500 million and 50 million people died. What is different about today is health-care technology and how international health organizations such as the World Health Organization are positioned to react quickly and mitigate the outbreak of these diseases. Technology has also supported virtual workplaces and delivery services to minimize the incidences of travel and contact that had previously been non-existent.
Let’s speak to the fundamentals that relate to investing and the Market, foremost the Market is not one entity it is comprised of many companies and sectors. Although certain sectors are suffering such as travel, other sectors are profiting such as streaming companies, virtual meeting companies, biotechnology companies and many more. If one steps back from the “Panic Button” logic would dictate that even a pervasive pandemic would not shutter the stock market, companies, for the most part, will continue to exist and many may profit as a consequence of this illness leading to business practices or habits that are specific to a company’s business or niche. Consider the Communications sector, which in the past may have been primarily Verizon and AT&T and now includes companies such as: Facebook, Google, Netflix, Activision, Electronic Arts, etc. Do you feel that these holdings would suffer considering an environment that temporarily shuns community and crowds? I certainly don’t think so.
The key to holding up, emotionally, to any market decline is to make sure that your portfolio was positioned correctly in the first place based on your tolerance for risk and financial goals and rebalancing to that allocation on, at least, an annual basis.
For our clients, we have a very systematic process of using investments that have historically mitigated unwarranted risk and incorporate a strategy of “defining outcomes” through the use of fixed income, “equity-linked” CD’s and hedging risk through options. We research investments relative to the underlying indices and seek to find both broad and strategic investments that have strong “upside capture” in order to participate in the gains of the market but lower “downside capture” in an effort to shirk off the impact of a declining market. In addition, we control what we absolutely can control by minimizing fees and expenses and excessive taxes by using investments that may have no or low imbedded expenses and utilizing strategies that incorporate “Tax Alpha, “Asset Location” and “Smart or Strategic Beta” investments such as minimum or low volatility products. Also, we had already been reviewing accounts in light of volatility through the trade wars on a much more frequent basis and incremental changes, as needed are usually attended to on about a quarterly basis.
I am not suggesting you stay the course but take a realistic view regarding the market and the fear of this illness. Also, do a more precise analysis of your portfolio to consider the inherent risk and how that measures relative to your tolerance for risk, needs and objectives. Change your asset allocation if your portfolio is not properly aligned to who you are and what you want as an investor. Bear in mind, these are your “risk assets” they aren’t supposed to behave like savings accounts, certificates of deposits and government securities. That is because they are intended for a different purpose, these are assets that are meant to keep up with the impact of inflation and the rising cost of living to sustain your purchasing dollars over time. As such, if you are risk averse, do the studies with a financial planner to determine the minimum amount of investment needed in the market to target your financial goals. Take this time to steady your nerves, think logically but be proactive in analyzing your portfolio and meeting with a Registered Investment Advisor that is held to the accountability of a fiduciary by the Securities and Exchange Commission and therefore is required to always make the interests of the client the priority in any engagement. We welcome your thoughts and concerns and are committed to the pursuit of your financial objectives.
Irv Rosenzweig, CFP®, ChFC®, CLU®, CRPS®, AEP®, AIF®
President & Chief Investment Officer