At FSG we understand you have placed a great deal of trust in us. You have worked and saved and, in many cases, invested your life savings with us. We do not take this responsibility lightly. In many of my previous writings you may have heard me use the term market noise and preach about focusing on the long term. I won’t call the Coronavirus market noise because people have died, so it feels a little insensitive, and with how quick the recent drop in markets has occurred I cannot blame you for being concerned about that “noise”.
While working on the data for this piece, I first talked to the rest of the team and it was reaffirmed to me that we have had a relatively small number of calls from concerned clients. So first, I want to say thank you. Thank you for trusting us with your investments and thank you for having confidence in our process. While advisor friends of mine have been stressed because their phone has been ringing off the hook with worried clients, the phones at the FSG offices have been relatively quiet. I don’t know if that means we are doing a great job or if we just have great clients! We as a team still believe it is important to get this communication to you because even though you might not be concerned enough to call, we understand you want to know that we are on top of the situation and we certainly want to keep you informed of our thoughts.
In this writing I hope to clearly convey three points:
Put this downturn into perspective.
Share with you market data from previous Epidemics.
State our portfolio positioning with outlook.
As of the close of markets on 02/27/2020, the S&P 500 is down over 12% from it’s all time high. This is of course after an enormous year in 2019 where the S&P 500 was up more then 31%. A fall of greater than 10% from all time highs might sound like a big deal but this happens on average about once a year. In fact, this is the 8th drop of more than 10% since this bull market started in March of 2009. I will say the speed of this drop (8 days) is surprising. We believe some of the reason for the speed of this drop is due to algorithmic trading. You see much of the trading that happens in the market these days is done by computer algorithms at large institutions. Once the market hits certain levels high or low it can trigger sells which in turn causes a snowball effect and can push markets even lower. I pulled the chart for the recent downturn and couldn’t help but notice it looked familiar. What you see below is a comparison of the current downturn and the downturn that occurred in December of 2018.
December 4th-24th 2018
The Last 8 Days
Now the reason behind each of these “corrections” is very different. In 2018 it was because the fed raised interest rates too quickly and this time is because there is a virus that is spreading and will have some unknown impact on the economy. Even though the reasons behind the corrections are very different, in both scenarios it looked like things might only get worse. We, of course, know that is not the case with the correction of 2018. If we look at what markets have done since the day the crash of 18 started until today…
The S&P is still up despite two downturns exceeding 12%. I hope that puts the downturn into perspective.
Now back to the topic at hand: the Coronavirus and market reactions to epidemics. I’m not going to sugar coat the fact that this will probably have an impact on the economy, particularly in China which is, of course, the epicenter. With that being said, China has many economic levers they can pull to increase GDP and provide fiscal stimulus. In addition, it appears that China is starting to get businesses going again with many stores reopening and a reported decline in cases. The market at this point is reacting to the unknown. We simply cannot know how far the virus will spread domestically and what the total economic effect will be. What we do know is how the market has reacted to these types of events in the past. The chart below was produced by Morningstar.
As you can see, the market was positive 6 months after almost every epidemic situation since 1998. We cannot take the past and project it into the future. However, we know that the anxiety we may be feeling about the markets right now has been felt many times and it turned out that there was really not much to worry about.
We cannot put a number on the impact this virus will have on markets or economies. Neither can leading scientists or economists. That unknown is the very reason markets are reacting dramatically and often when markets react dramatically they are overreacting.
I think it is important at this point to note that nearly every portfolio (all but our most aggressive) at FSG has conservative investments that help offset downturns like this. For example, the SPDR Portfolio Aggregate Bond ETF (SPAB) is a fund that is held in many accounts. If that specific fund is not held, there is likely something very similar. Our most aggressive portfolios may not have a risk offset such as this, but those portfolios are meant to take the full ebb and flow of markets over long periods of time. To illustrate how SPAB can help offset the risk of market unknowns we merely have to look at a chart comparing SPAB to the S&P 500 year to date.
Times like these are why we have diverse holdings such as SPAB and even international holdings. Would it surprise you to know that Emerging Markets are actually down less then the S&P 500 during this correction period?
Ultimately, we are going to maintain our long term diversified investment philosophy but that does not mean we are not monitoring the situation closely. As new information becomes available we will take it into consideration and you may even see changes in your portfolio. Any potential changes might be reflective of a better fund option, an allocation rebalance, or us looking at an opportunity to enhance your portfolio. Again clients and friends, thank you for trusting in us!
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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Written by Brice Carter.