Approaching Coronavirus From an Economic StandpointSubmitted by North Main Financial Group, LLC on March 10th, 2020
There have been several different dynamics we have observed, and of which we have lived, over the last 20 years since North Main Financial Group has been in business. We had the Internet boom, and then bubble, and then the bursting of the bubble at the end of the 1990s and into the early 2000s. We then had what some would describe as a real estate bubble happening from 2005 to about 2007. Then we had the economic crisis of 2008 and 2009 and the subsequent recovery since then. We've seen a lot of things over the last couple of decades, some of them good and some of them not so good.
We had another experience like that this past week in a historical context, meaning that it’s not the kind of thing we see every day, but it the kind of thing we have seen previously, and that was a significant downturn in the market. If you were invested in stocks or equities, and you were invested on the long end, meaning you were invested or are invested for long-term appreciation, then you probably experienced some pretty negative volatility last week. In such a measure, at least in the course of five subsequent trading days, it's the most that we've seen in over a decade. Meaning we haven’t had that much negative volatility happen in that tight of time frame since 2008, the beginning of the financial crisis.
So, for many folks, investors, who are in the market at this point, many have never experienced anything like that. Meaning they've been invested since 2008. Many people were invested at that time, and you remember a little bit about what that felt like. As we get further and further away from those kinds of experiences, sometimes it’s easy for us to forget what that kind of experience was like.
This past week, we saw the market accelerating in terms of its pullback and then again the number of days where it was 800 to 1000 points or more in the negative on the Dow Jones Industrial Average as measured by the Dow Jones Industrial Average Index. It became apparent that even for folks who had invested say 10, 12, 15 years ago that they had forgotten about what that experience is like. You could tell by some of the things being broadcast, and some of the commentaries on the evening news shows, that many folks forgot about what that felt like and what can happen.
We are creatures of habit, and as we get into places that are a little bit more comfortable, especially in areas that we desire, and certainly, if you are long in the market, then you want to have things appreciate. It’s been a good decade relatively speaking for many folks. Again, it sounded a lot like a new experience for many people, but it wasn’t, and it isn’t even now, and in many ways, we are still in the middle of it. No matter what the market has done here over the last couple of days, or what it will do over the next couple of days, there was enough movement made within those five days that it really did shift things as far as a lot of companies are concerned. In many ways, we won’t know what the effects are for the next several months to even a year or more.
Today's blog will discuss what happened this past week, and how we think about it, how we approach it. It's not the kind of thing that is going to be complicated, but over the years, we've learned a couple of things, and one of the things is to keep applying what sometimes is called the KISS acronym or the Keep It Simple Sir aspect of doing things.
It's the kind of thing, as we’re watching what’s happening in the market, we can ascribe a lot of history to it, and we can see this kind of performance before. It's easy to get lulled into a space of - this is what has happened before, so this is what's happening now. Yes, there are some things we can learn from history but no from the standpoint that there are many variables involved currently that perhaps weren’t even in existence. That’s why when sometimes folks ascribe a hot market to the Internet bubble of the 1990s, that might be in terms of the raw numbers of performance of certain indexes or the ways in which we track things. However, no from the standpoint that we barely had email, let alone any kind of proliferation of Internet involvement in anything.
Now for many of us, not just a handful, literally for tens of millions of us, we’re living our lives by a smartphone that in case you missed it, at least in so far as the Apple iPhone is concerned, is barely ten years old. That seems hard to believe as well, but it is barely ten years old. From a variability standpoint, yes, there are some things we can learn from history, but there are also some new variables involved.
We wanted to give some time to understanding what Coronavirus means, not that we’re medical experts, but understanding what it is and what’s happening around us as a result of it. How do we apply that to our thought process and, most important, what we should do, or shouldn't do, moving forward.
In this blog, we're going to be talking about some of what has happened in the stock market over the last couple of weeks. Specifically, the near historical, and in some ways historic, movements that have happened in a very concentrated amount of time. Certainly, nothing that we've seen in terms of its negative volatility for more than a decade.
The Coronavirus, what is it? What is its proliferation? What are the possibilities in terms of what comes next? Frankly, we're not medical experts, so we're not going to dive deeply into that. The short on it is, it is indeed a virus that has been spreading in several areas including in small ways here in the United States. There is great concern about the possibility for it to spread even further and faster. Now, will it? There’s no way for us to know. Are there efforts in place now to work to contain it? Yes, indeed, there are, but we're still in the middle of it.
Folks are saying, “What does this mean for my portfolio? What does it mean from a planning standpoint?” Well, the frank answer is, and the most truthful answer that we have is, at this point, we truly don’t know. There are some things that we keep in mind regardless of what's happening around us, and those are the principles we're going to talk about here. None of this is intended to be a specific recommendation for you. We strongly encourage you to reach out to your tax advisor, reach out to your financial advisor, or you’re always welcome to reach out to us at www.NorthMainFinancial.com.
In three points, we're going to be talking about Coronavirus, or CORVID-19 (the scientific lab name), and what does it mean for us and how we think about our planning and how we think about our investment management.
Take a deep breath and evaluate.
First, let’s identify what happened here over the last several days. In short, if you measure performance in the stock market by the Dow Jones Industrial Average or the S&P 500 Index, and there are dozens if not hundreds of other indexes that track all kinds of things, we’re going to be using those as a measuring point simply because they’re the most popular that we see out there. If you use the Dow Jones Industrial Average or the S&P 500, then during one week, we had negative volatility, or pullback, between 11 and 12 percent over five trading days.
That’s pretty amazing when you think about it. From a planning standpoint, we plan very modestly at North Main Financial Group. Looking at planning from anywhere from four to seven percent when we’re talking about an equity portfolio over the course of a year. Here we had 11 to 12 percent volatility in a negative direction over a week. Pretty breathtaking, especially if you haven’t experienced that before. If you haven’t lived through some of the more shocking financial circumstances, perhaps the recession in 2008, 2009, the breaking of the Internet bubble in 2000 and again in 2002, if you haven’t experienced some of those shocks then this was probably pretty breathtaking for you, and you might be scrambling a little bit, “What do I do now? Is there something I should be doing differently?” Frankly, chances are probably not. The time to have done something was before this happened in most instances. That’s why it’s so important not only to have a good plan in your mind but also to have a plan which is flexible.
If you are taking too much of a bet one way or another, frankly, when it’s going up, you’re going to feel wonderful. Then when it’s not going up, you’re going to be pretty miserable. We always talk about financial flexibility at North Main Financial Group. You want your plan, you want your investments, to have financial flexibility as well. If you are making bets one way or the other, again, when they hit, you’re going to be thrilled. But when they don’t, you may put yourself in some financial challenge. So, make sure, and we strongly encourage folks to have some financial flexibility. But the first thing we encourage folks to do as we encounter these experiences, and this may seem a little elementary, is to take a deep breath.
We say that from the standpoint, especially in this day and age, where news, data, and information are literally a 24/7, 365 kind of experience, and it's just coming at you in droves, every moment of every day of the year. We encourage folks to just take a breath and to evaluate. When we say evaluate, we really encourage folks to look at it in a barebones kind of way.
Understand truly what your strategy is. Not what you would like your strategy to be, or what you wish your strategy was, but truly what your strategy is today. It may be possible as you are looking at it, that you say, “You know what, I really don’t know what my strategy is.” There's nothing inherently wrong with that, but frankly, if you don’t have a plan to get somewhere, then the chances are that you’re going to plan to get to nowhere. This is not always true; sometimes we dumb-luck into some things. But certainly, it is true that we increase our probabilities of success when we have some intentionality about where our plan is going.
So, the first thing that we do when we experience, especially the kind of negative markets that we’ve had here over the last couple of weeks, is to take a deep breath and evaluate. If you use an advisor, consult with them. You want to take the time to really look at where things are. What is it that you would like to have happened? Are you planning for retirement? Are you planning for some more intermediate goals? Are you planning for college education expenses for children or for grandchildren? Or, are you building your business in such a way that you’re hoping it’s going to sustain you not only during your working years but in retirement? Those kinds of questions answered truthfully are sometimes the most important things to keep in mind as a first step when things go negative in a substantial way.
Gather as much data and take a look at it through the scope of history.
Gather as much information or data as you can and then where it’s appropriate to look at it through the scope of history. Meaning, take a look at it to see if perhaps we have been in similar kinds of places before. For example, as we’re working our way through what this Coronavirus means not only from a medical standpoint but from an economic standpoint, it’s helpful to take a look at history over the last couple of decades to see similar kinds of outbreaks and what the differences are and what the similarities are to the spaces where we are currently.
For example, many of you may remember the SARS outbreak in 2003. We then had the H1N1 outbreak in 2009, and then we had Ebola in 2014. Now, there were some similarities and some differences, and we aren’t going to get into those details here. But it’s been helpful to us at North Main Financial Group to take a look at what those experiences were and then in so far as the investment universe and market performance were concerned to take a look at how markets performed during that time. Obviously needing to weed out the different variables because it wouldn’t be an apples-to-apples comparison but trying to understand what happened as far as the progress was concerned. We look at how it was both engaged from a medicinal standpoint and then also from a containment standpoint and to see if there are similarities in how we are approaching it today. Frankly, there have been similarities, and there have been differences, but it’s been helpful to see some of the variables which are similar and applying that from a thought process to where we are today. We do that so we can get the best handle that we can as fast as possible and be able to share that with our clients.
As you can understand it, and you may be in this kind of place, it can be pretty nerve-racking. It can be frightening when every time we turn on the news, we see yet another incident of it either spreading or of someone passing away from those kinds of circumstances. We encourage folks to gather as much data as you can and then look at it through the scope of history. Understanding where we've been with similar kinds of circumstances. What happened? What didn't happen? What have we learned from those previous experiences? You don’t want to go too far back because then you’re talking about more variability than probably is appropriate. That’s why we just went back to the SARS epidemic in 2003. When we looked at that, H1N1, in 2009 and Ebola in 2014, we were able to find some data points which we found to be helpful. So, gather as much data as you can and look at it through the scope of history.
When it comes to your plan or your investments, adjust, but only if it’s appropriate.
That seems, again, like an elementary and maybe even an intuitive kind of thought process. Quite seriously, and you may not be in this camp, but if you are, you are probably going to be a small portion of folks, who, when the market is going down, one of their first instincts is to sell. Especially if they are on the long side of the investment curve, meaning they are investing for long-term capital appreciation. Many folks, when it comes to investing, think, and act in linear ways. Meaning that whenever the market is going down, there is something that is biochemically wired within us that believes it’s going to keep going down forever. Then when the market is going up, there is something biochemically wired within us that believes it’s going to go up forever. This is amazing because, at no point in history, especially over extended history, has that ever occurred. It’s an amazing kind of process that we’ve been able to observe dozens, if not hundreds, of times through the decades, and it happens time and time again.
The Dow Jones Industrial Average and the S&P 500 down 11 to 12 percent over the course of five days, how do we come at it? Take a deep breath and evaluate. Get as much information as you can and look at it through the course of history. Finally, adjust, but only if it’s appropriate.
Interested in hearing more about this topic? You can listen to the full episode of the North Main Financial radio show on WSIC by clicking here: North Main.
If you have questions about your financial goals or would like to talk with us further about our services, give us a call at (704) 987-1425 or visit us at www.northmainfinancial.com. If you wish to schedule an introductory meeting, we would be happy to meet with you at no cost or obligation to you.
These Blogs are provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of SagePoint Financial.