Category: Market Drop

When the new decade began just a couple of months ago, the S&P 500 was consistently creating highs, reaching a peak of 3386.15 on February 19^th.

In the month since, the status of the market has been anything but rosy…

As a result of the rapid spread of COVID-19, nations across the globe are shutting borders, quarantines are going up left and right, and the market has shed about a third of its value.

One month. That’s all it took for an historic high to become a significant low.

I have been scouring news articles, tuning in to the daily Coronavirus Task Force briefings, and tracking developments across the globe. I have spent more time watching stock charts in the last few weeks than in all my previous days combined. And while few will feel that the crumbling of the markets is an exciting time, there is a silver lining.

In just a few weeks, I can’t help but feel like I have tapped into some rare wisdom…wisdom that would not have presented itself if not for the abrupt arrival of such a calamity.

I was in elementary school during 9/11, and a high schooler during the Great Recession…too young to fully grasp the reality of the first, and just old enough to appreciate the gravity of the second. Even the economic effects of the Great Recession weren’t entirely clear to me…the causes were even hazier.

Now older, wiser, and a half-decent self-study, I am acutely aware of where we find ourselves…smack dab in the middle of a once-in-a-lifetime education. After all, life’s great lessons don’t present themselves during times of comfort.

To quote Robert Kennedy, “All of us might wish at times that we lived in a more tranquil world, but we don’t. And if our times are difficult and perplexing, so are they challenging and filled with opportunity.”

Our time is certainly difficult and perplexing…but most importantly, it is one of great opportunity.

Observations

In documenting some of my observations, I have identified certain vulnerabilities being exposed through the unfolding of some fundamental cause-and-effect relationships.

Here is what I have so far.

Globalization: the rise in globalization has brought with it what many consider to be tremendous positives: ease of trade, travel, and cultural exchange. On the flip side, the ease of mobility around the globe, and our tremendous interconnectedness is beginning to rear its ugly head. While this will likely be a relatively short-term event, it will undoubtedly prompt some interesting governmental initiatives after everything is all said and done.

Supply Chains: not only are we highly connected as people, but corporations and their reliance upon effective supply chains – both inside and outside a border – are dependent upon ease of movement. While not a new or abstract concept, we had not previously seen such a disruption in the way that we are right now…and so quickly. If car parts or electronic components are built in China for their ultimate assembly in the United States, these items aren’t being produced and shipped during mass quarantine.

Business Debt: Total business debt in the U.S. recently surpassed total household debt for the first time since 1991. Why? Low interest rates. When interest rates are at or near zero it encourages companies to borrow heavily due to the low cost to service that debt. This leads to a highly leveraged corporate America. When companies carry too much debt, they are vulnerable during a downturn when demand has been reduced (or extinguished altogether, as we are seeing with governments forcing business closures). When they can’t service debt and pay operating expenses…they can’t keep employees on payroll.

Personal Finance

In addition to the broader economics of the situation, there are some key personal finance lessons being reinforced.

Lesson #1 happens to be the most important, and it cannot be overstated: always hold a healthy amount of cash. While others are worried about their cash flow if they lose their jobs (servicing debt and keeping up with expenses), a small number of people are comforted – if only marginally – by their healthy cushion of cash. An even smaller number not only have enough funds to get them by for a while but have excess capital that they can deploy – like purchasing stock at heavily discounted prices.

Additionally, for those who borrowed money to purchase securities (buying on margin), holding adequate cash prevents a forced sell-off of securities to cover the maintenance requirement when the value of the securities declines. These margin calls have exacerbated the slide in markets in the past few weeks, as many were forced to liquidate their securities – potentially at a loss. Be careful with your debt exposure.

Secondly, if you are buying stocks on the way down, set a price point you are comfortable with and walk away. Once you have completed your analysis of the company (determining intrinsic value, outlook etc.), it doesn’t do any good to watch the stock price continue to slide after you have made your purchase. Ideally, you bought a piece of the company as a long-term investor. Pivot to the next company if you still have more cash to work with.

Outstanding Questions

In closing, there is still a lot we don’t know. We would be wise to pay attention to see how some of these questions get answered. Here is what I want to know…

As a result of all this debt and these unique circumstances, who will get bailed out? We know that the likelihood of corporate bailouts is quite high (e.g. airline bailouts after 9/11; financial institutions and automakers during the Great Recession). Assuming they do get bailed out, what requirements will be implemented? Will airlines be prevented from spending money on stock repurchases, as so many are now calling for?

Additionally, as a part of any such spending package, will checks be sent to American families? It seems a foregone conclusion at this point, but how much will each person receive? How will they be made equitably?

Looking ahead, how will this impact our way of life after this crisis is behind us? This is an undeniably broad and difficult question to answer. Will governments spend more money and expend more energy preparing for the next global health emergency?

Only time will tell.

The global spread of the coronavirus has forced companies to halt business trips, crowded cruise ships to sit at port, and the Federal Reserve to issue an emergency cut to interest rates – the first since the 2008 financial crisis.

To end the month of February, the S&P 500 fell 10% in six trading days – the fastest move into correction territory in history.  In the first four days of trading in March, the Dow Jones Industrial Average whipsawed back-and-forth.

Note: percentages were rounded to the nearest tenth. Source: Wall Street Journal

Now, the pundits on TV and in newspapers are offering their predictions for where the market will go from here and whether we will sink into a recession. There are some, however, that have astutely acknowledged a simple truth…

We can be certain of only one thing, and that is that we cannot be certain of anything.

If that statement seems like a contradiction, it’s because it is.  Nobody knows what will happen to the market or to the economy for that matter.

Instead of allowing this idea to sow panic, it should serve as a source of clarity…potentially even comfort. That’s because amidst the chaos of irrationality, you gain solace in remembering your long-term plan. The investing strategy that you developed – the one that has worked for you for months or even years – will continue to do so. But it will only continue to work for you if you follow it. Here are a few reminders:

• Unrealized Losses – you have not lost any money until you sell a security…so don’t sell anything unless it is already part of your investment plan (unlikely for most).
• The stock market will rise – the market goes up and down, but over the course of years/decades, it will go up. Steep drops will happen along the way. Speaking of the market…
• You cannot time the market – few people on earth can effectively time the market consistently over any considerable period of time. When will it reach the bottom? No one knows. So be careful when waiting for that “perfect” buying opportunity.

As for the virus itself, the world will recover, we just don’t know how long it will actually take and what the human and economic toll will be.