Dear friends,

U.S. stocks fell again on Wednesday, with the Dow Jones Industrial Average closing in bear market territory, down 20.3% from its recent peak back in February. The S&P 500 Index was down 19% from its February peak.

Today, as of this writing (3:00pm EST) the stock market is down almost 2,000 pts and headed for its worst single day performance since 1987.

So, what’s changed in the last week?

Why all of the carnage on wall street?

Why all of this concern? Should you be concerned?

WARNING: some of what is below may be old news by the time you actually read it

The number of COVID-19, also known as novel Coronavirus, cases have continued to rise worldwide, prompting the World Health Organization (WHO) to label it a ‘pandemic.’ Meanwhile, Saudi Arabia and Russia are having an all-out price war on oil. On Monday, Saudi Arabia cut its official crude selling price. On Wednesday, they unveiled plans to boost their oil-production capacity. The price for Brent Crude oil – the global benchmark – has fallen from about $59 per barrel on February 20th to about $36 per barrel on Wednesday. Not to make a pun, but this was like throwing jet fuel on an out-of-control forest fire.

Today, we saw a massive blow to many of our social institutions. The NBA, NHL and MLS have all suspended their respective seasons indefinitely. A multitude of concerts and movies have been delayed. March Madness is cancelled. All of the local high school sports in Michigan have been postponed. Nearly every college, university, public and private high school nationwide have chosen to either extend spring break, cancel classes or adopt virtual and online classes. Travel to and from Europe is banned. Tom Hanks is infected with the virus. A popular Detroit tradition, Opening Day, will be delayed at least two weeks. Life just changed immensely in a mere matter of days.

Suffice to say, much has gotten worse since I last penned a piece concerning our feelings on the Coronavirus. Everyone wants to know, what will happen next? When is the bottom? What will or can the government do?

When pondering predictions and the current situation, I think the words of Liz Ann Sonders, Chief Investment Strategist from Charles Schwab sums it up nicely in her piece Manic Monday earlier this week:

“In the easiest of times (are they ever, really?) it’s futile to make predictions about the market with any semblance of accuracy. Clearly, these are not the easiest of times; so the futility is magnified. Even with non-stop coverage of COVID-19; with every question answered, there’s another question to ask.

The human toll is immeasurable; but at this stage, so are the economic and market tolls. Ideally, we do look back and say some of the hysteria was overdone; but being prepared (and disciplined when it comes to investing) is unlikely to make things worse.

As most know, there is some reason for hope given the flattening out of the number of confirmed COVID-19 cases in Mainland China. There is also a still-sharp trajectory for the number of recoveries. The problem is that cases outside Mainland China have only recently begun to accelerate—with expectations of significant jumps to come in the United States once testing can be done more widely. In the meantime, markets are at the mercy of virus news—good and bad.”

Looking at the above chart, it seems like there is some reason for hope. There should be an expiration date for this crisis, but positive sentiment is not coming through just yet. Frankly, medical experts are still figuring this situation out.

The uncertainty is making businesses, people and investors ‘price in’ worst case scenarios. Think about it, have you tried buying toilet paper lately? Hand sanitizer? Bananas? People everywhere are definitely thinking worst-case.

When markets are in a ‘fear state’ we see prices move down and move down fast. This is not unusual, our first bear market in a decade seems to be following the same trend of past bear markets.

 

The matter is not that a bear market is now happening. The matter is how are you going to react to this?  Once again, we can look to one of the experts at Schwab to give us some perspective:

“If markets are good at one thing, it’s reminding investors that stock prices don’t simply go up, uninterrupted, forever. Markets decline. It’s an unavoidable part of investing. What matters is how you respond. Or, more to the point, how you don’t respond in some cases.

Because if you’ve built a portfolio that matches your time horizon and risk tolerance when markets are calm, then a surge in turbulence may not feel so devastating; especially if you have adopted discipline around diversification and regular rebalancing.”

(From Panic is not an Investment Strategy. March 10, 2020, Liz Ann Sonders)

For those already invested in the market and have recently opened statements, you may be asking yourself, ‘Why am I doing this to myself!? This is nuts. Preposterous. I could earn more in the bank.’

I’ll answer. You are doing it because you know that equities earn better than cash over the long run and by a wide margin. A simple tool to help remind yourself about this fact is called the ‘Rule of 72.’ The rule asks you to simply divide the rate of return earned into 72 and that will tell you how many years it will take your investment to double.

For example:

  • A hypothetical $100,0000 investment growing at 3% CD would take 24 years to double to $200,000.
  • A hypothetical investment growing at 9% in an stock mutual fund would double three times in the same 24 years and end with a balance of $800,000.

Most of us will take the $800,000 over the $200,000 all day. But that excess return is not free! The price of admission to the 9% club is in understanding, maintaining and keeping to a long-time horizon via mental discipline while enduring bouts of massive volatility. Although it feels extreme right now, market losses around 20% will rear their ugly head more than you think.

The $800,000 question is will you stay on the ride long enough to reap the rewards?

What to do? What not to do?

In the meantime, our advice to investors hasn’t changed. For the past two decades — we have been pounding the table on diversification, periodic/systematic rebalancing, and understanding your own risk tolerance and time horizon.

Those tried-and-true disciplines are the closest thing an investor can get to a ‘free lunch’ in this crazy business that sees many ups and downs.

Stay tuned for more. As always, we will be steadfast in our research, observations and analysis of the market situation. Don’t hesitate to call. We are open all weekend and will proactive reach out to you if warranted. Remember to constantly wash your hands, look out for loved ones and keep in mind that sometimes the only thing we have to fear, is fear itself.

Or, just take cue from Warren Buffett’s famous line.

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful’.

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“The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.”

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* Source: Pew Research Center
† Source: “Quantitative Analysis of Investor Behavior, 2014” Dalbar Inc. Most recent data available. An index is un-managed and one cannot invest directly into an index.

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