As I followed the events of yesterday and the impact on the financial markets during the day, I reached out to Fred Dopfel, our Investment Committee Chair to hear his perspective. I also asked him to comment on 2008/2009, for while every time the markets temporarily decline things are “different,” what is remarkably consistent is the sentiment: tremendous fear and uncertainty, a feeling among many of “no bottom” to the markets, and falling markets such that the “circuit breakers” kick in (where market trading is halted for 15 minutes to help stop the daily fall.)
While I have over 30 years of experience in the financial markets and have advanced education in economics and financial planning, Fred has even more experience and education – much more – and while what follows are his comments, I couldn’t agree more.
“What’s happening? Today, the market is reacting to further developments on the Coronavirus and, more specifically, a sharp drop in oil prices. The drop in oil prices is associated with lower demand for oil because of the slowdown in China and other regions. The drop in oil prices has had a broad impact on the energy industry, with the share prices of many oil companies dropping on the order of 25% today.
The stock market acts like a calculator, processing new information, while sorting out changes in the near-term impact on earnings and growth. This is called ‘price discovery.’ The sectors most impacted by current events are restaurants, travel, energy, entertainment, tourism, hospitality, and client-facing retailers.
Does this market drop foreshadow a repeat of 2008/2009? In my opinion, No. The great recession in 2008/2009 was a credit crisis that impacted financial institutions in a big way. Fortunately, banks and other financial institutions are much less affected this time and important lessons have been learned from our experience a decade ago. Further, there is nothing fundamentally wrong with the consumer or the economy in general. However, the chance of a ‘normal’ mild recession in the U.S. over the next few months has increased. But even during recessions, it is wise to remain fully invested as the recovery in stock prices can occur very suddenly.
What to do? If the market drop were purely irrational, we would suggest increased buying into the market now. However, there is enough uncertainty about economic impacts of the epidemic to suggest that a significant part of the drop may be a rational reaction to postponed (or lost) economic activity. Remember too, that strong appreciation in stock prices last year resulted in price-earnings ratios thought to be relatively high in January, as compared with historical values. As the current market (after correction) may be fairly valued, we ought to ‘hold’ and stay the course with your current portfolio allocation. The good news is that we will get through this epidemic and things will eventually return to normal.”
One of the research projects we conducted in 2010 was an exhaustive review of the 2008-2010 markets and, with the benefit of 20/20 hindsight, an assessment of what we could have done to “avoid” or reduce the impact of the markets’ volatility on your portfolio. We looked at virtually every possible strategy and how each one performed and, importantly, what one would have to have known in advance to effectively implement these strategies successfully. What we discovered – and validated – was that without almost a near-perfect ability to predict the future – carrying out your long-term strategy, rebalancing your portfolio as markets moved, and harvesting tax loss opportunities as available were the most effective methods of reducing your risk and improving your long-term performance.
We appreciate the trust you have placed in us and will continue to let you know our thinking. Please feel free to reach out to your advisor and stay safe!