Looking back on the last two months shows the extreme volatility we have seen in stock and bond markets globally.  We wanted to update you and share our thoughts.  From the market peak on February 19 through March 23, the S&P 500 index fell 34%, the fastest decline in history.  This index continues to be one of the best-performing out there as small-cap and international indices fell more.  If you had a $10,000 portfolio invested all in stocks, it would have fallen to $6,600.  This is painful, and the larger your portfolio, the more painful as people relate more to dollars than percentages.

A typical reaction is to want to sell when this happens and wait until things get better.  We can tell you from our decades of experience, that rarely works.  If you sell, you may have some comfort in knowing you have stopped the hurt.  If the market continues to fall your decision is validated.  But these two things combine to make it very difficult to get back into the market, as there will always be bad news that prevents you from buying back in even as markets improve.  If the market goes back up, you will also have difficulty getting back in because you will want to wait until stocks get cheap (where you sold) again.  Many people who sold their stocks in the Great Recession of 2008-2009 never got back into the market or missed a lot of opportunity as they waited for things to get better. 

Last week, from Tuesday through Thursday, the S&P 500 index rose 17.5%. The news outlets touted that was the best three-day move since the 1930s.  The $10,000 portfolio that had dropped to $6,600 would have increased to $7,775, which would still be 22% from its original value.  This is a great illustration of how percentages work.  If a $10,000 investment falls by 50% to $5,000, it needs to increase by 100% to get back to $10,000.  The news also highlighted what is known as the fear of missing out (FOMO).  What if that was the low?  Do I need to buy?  Given the volatility and news streams, one could also reasonably ask, was that the high?  Is this the Great Recession II or worse?  Do I need to sell?

The market is reacting to the spread of the coronavirus and energy prices.  The range of potential outcomes is extremely large, which is evident in the huge increase in market volatility.  We have seen well-thought-out arguments to be bullish and bearish.  To briefly summarize, the bull case seems to rest on a relatively brief (2-3 months) shutdown of the economy with recently announced stimulus that gets us through the downturn.  Returning workers and pent-up demand drive economic activity higher, and things return to normal by year-end.  When you hear “V-shaped recovery”, this is what they are describing.  The bear case, simplified, takes the severity of the virus and the fallout from energy prices, amplifies them and then increases the amount of time it takes to recover.

Obviously, we want to be optimistic, but we cannot rule out less favorable outcomes.  On the positive side, we would note the massive amount of stimulus.  The package that passed is estimated at $2 trillion and comes on the heels of the Federal Reserve’s interest rate cuts and massive quantitative easing.  Regardless of your point of view on what is in the package, this is an incredible amount of money that will help people transition through this crisis and provide economic stability in the near-term. We fully expect economic numbers to get worse before they get better.  We need to remember that markets look forward, and you don’t want to wait for good news as prices will reflect them.  Walter Deemer, who spent 50 years on Wall Street as a market analyst says, “When the time comes to buy, you won’t want to.”

The incredible amount of negative news today (and the lack of college baseball to offset it) certainly can prompt an investor to want to take some action.  A large amount of the assets we manage are in mutual funds whose portfolio managers we respect.  They have significant experience, credentials and investment track records.  Their job is to actively find the best investments they can on a daily basis.  Market volatility like we have seen recently can cause the price of individual stocks (and bonds) to fall out of line with their underlying value. 

This is not a recommendation, but an illustration:  If I am a manager of a stock fund, McDonald’s may be on my list of potential companies that I want to own.  The price of McDonald’s stock may have been too expensive when I looked earlier this year.  Recent market volatility has caused the stock to fall from $215/share to $130/share, and it currently trades at $159 (see 1-year chart below).  Price changes the attractiveness of the investment.  We know that in the short-term (3 months,  6 months, 1 year?) business at McDonald’s is going to be negatively impacted, but does the current price reflect that and what do we think the stock will be worth 1, 3 and 5 years from now?

We don’t have any insight as to whether this market decline is over.  If markets continue to fall, as investors, we want to view market volatility as investment opportunity.