My F&M

3/13/2020 Market Update

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In the midst of extraordinary volatility in markets, we strive to keep our clients and valued relationships well informed.  With that said, here are some things we know:

The CDC and other health organizations are clear that COVID-19 will get worse before it gets better.  We know there are many more cases in the US than have been identified since widespread testing has been slow to ramp.

Yesterday, the stock market was down about 10% for its largest one-day decline since 1987.  That move left the stock market down 27.6% from its high as of February 19 (measured by the Russell 3000 Index).  Today, markets rebounded a bit but as of this mid-day writing, remain down about 25% from highs. 

The average bear market over the past 70 years saw the market decline by nearly 34%.  The last bear market occurred during the Credit Crisis of 2008-2009 and was NOT an example of a typical bear market, as stocks then fell 56.8%.

The average bear market duration in the last 70 years has been 14 months, with the shortest having been 3 months.  The current one has run less than a month.  However, historically, when stocks enter bear markets relatively quickly, as this one has (measuring the time from market peak to a decline of 20%), they tend to be shorter in duration and a bit less severe.  Note, however, that these averages are all based on small samples and each circumstance is different.

Volatility in stocks in the past fifty years has only jumped as high as it has recently on three other occasions, in 1987, 2002, and 2008.  Such spikes in volatility did not coincide with ultimate market bottoms but each tended to be relatively close in time and distance (but, again, this is a very small sample). 

As you know, we have been saying for a very long time that stocks had been expensive and that some sort of market correction seemed overdue.

The economy, at least as measured by the job market, had been quite robust going into this bear market and we see no reason to expect it will not rapidly recover on the other side of the COVID-19 episode.  But the measures that have been put in place this week to close universities and many other schools, to cancel sporting events and other large gatherings, to have many work from home, etc. represent an unprecedented hunkering down that will obviously result in a rapid decline in economic activity.  Earnings for most companies will experience a temporary decline even if earnings power does not change.  While that will certainly prove to be temporary, no one knows how long that will last.  On the other hand, markets are highly likely to turn up before the extreme “social distance” measures are lifted, and the economy ramps back up.  The nature of markets is to lead, not follow such turns.

We also know that bear markets don’t result in permanent stock market losses unless one makes it permanent by selling.    

That’s what we know.  What we don’t know, of course, and what everyone wants to know, is when stocks will stop falling and find a bottom.  We don’t know the severity or duration of the coming economic pause nor do we know the severity or duration of the pandemic.  We don’t know when Russia and Saudi Arabia will stop their oil price squabble and return some discipline to oil production.  We know that stock price decline, the virus, the economic pause (whether it lasts long enough to be defined as a recession or not), and the oil price war will all prove to be temporary events.  But we can’t know how quickly any may be resolved.

The bear market has so far made stocks as a whole less expensive, has rendered some stocks cheap, and has left bonds extremely unappealing. Given that current stock levels are much more appealing than they were just three weeks ago, we are actively rebalancing portfolios toward targets by adding to stocks and reducing bonds.  But given that a bear market that only lasted three weeks would be unprecedented to our knowledge, we are tempering that rebalancing and not generally buying enough stocks to bring portfolios all the way back to target allocations just yet - splitting the difference, as it were, and buying some stocks now while holding some back to buy more later should better opportunities present themselves.

As we recently asserted and as you each know at some level, this too will pass. Please don’t hesitate to reach out to us if you have questions or concerns.