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A Historic Week for the Markets

Dear Clients and Friends of ZWM,

In the past, ZWM has worked with our friend Bob Veres to best relate how we look at the markets. Here is another of our joint efforts.

As many of you already know from seeing news headlines or checking your investment accounts, most equity markets were down around 10% on Thursday. At the time of this writing, markets are seeing a bump upwards. But then there is next week!

With world investment markets in full panic mode because of the global pandemic, traders on Wall Street are selling at virtually any price. The markets have dropped into bear market territory, meaning they are down over 20% from their recent highs.

The long bull market run that started in March 2009, and set many records along the way, is now officially over. May it rest in peace; we will all remember it fondly.

It is almost impossible to keep a rational perspective in the middle of a herd that is stampeding toward the exits, and this particular stampede can fairly be described as one of the worst in market history. A little digging through historical data shows that this is the fastest bear market on record; that is, the fastest the U.S. stock market has experienced a decline of 20% or more going back to 1915. The average number of days from a market peak to a 20% decline is 255, and the median is 156 days. The recent market selloff reached this dubious achievement in just 18 trading sessions. By contrast, the fabled 1929 market downturn took 36 sessions.

The COVID-19 pandemic should first be considered a health issue, and I hope everybody is doing what they can to protect themselves and their families from the spread of the disease. It goes without saying that your health is more important than your portfolio.

Is your health at risk? The World Health Organization published a graphic which suggests the COVID-19 virus in China has been more deadly, on a percentage basis, than the Spanish flu epidemic that raged across the world in 1918-1920. So far, it has been more deadly than cholera, and much more so than swine flu or hepatitis A. On the other hand, reports indicate that the elderly and people with pre-existing health issues are far more likely to die of COVID-19 than younger and healthier people. Also, the death rate outside of China has been roughly half that of China's. More testing will be needed before we know the full extent of the infected population and the morbidity rates for those who are infected.

I am not a medical professional by any means, but the spread of the virus in Australia implies that warm weather may not stop the pandemic. It may just have to run its course.

So, now may be a good time to hunker down, as best as you can, and order groceries from the online delivery service of your choice!

To this end, we at ZWM are ready to do any and all meetings in a virtual fashion, right from the comfort of your iPhone. More on that next week.

Once health precautions are taken, let’s address the portfolio matters, and how best to navigate the market conditions.

The Federal Reserve Board has cut a key interest rate by half a percent and added liquidity to the markets via Quantitative Easing. Those steps and more in the future will soften the effects of the pandemic but cannot prevent all the economic damage: while we admire the Federal Reserve’s efforts to bolster the economy and the markets, ultimately a disease is not affected by interest rates and monetary policy decisions. All this may not be sufficient to bolster the markets in the face of an epidemiological crisis.

Historically, bear markets are less impactful than their bull market counterparts. Of course, you could argue that a global pandemic is different from a housing market crash. Research analysts at Goldman Sachs took a look back at “event-driven” bear markets; that is, market declines that were not driven by an economic recession, but instead were triggered by things like war, oil price shocks or an emerging-market crisis. They found that the average event-driven bear market resulted in a 29% decline—on average. 

The report notes we have never before entered a bear market due to a viral outbreak, but in the past, bear markets triggered by “exogenous shocks” have recovered their previous levels within 15 months.

There is some good news for many investment portfolios: during the downturn, 20-year Treasury bonds have gained 24% in value, as bond yields have fallen to record lows. The 10-year Treasury yield experienced its biggest weekly drop since December 2008. This performance, so directly counter to stock movements, explains why it is so necessary to hold diverse investments in a portfolio.

The harder conversation is about market timing. Most people understand it is impossible to time the market without a working crystal ball. But this is easily forgotten when the daily headlines announce that your net worth is falling by 4-7% in a single day, when the stock portion of your portfolio has fallen by 20% in record time. The natural question is: should I get out now and avoid more of the same?

There is only one rational answer to this question: it has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish. In the past, the best strategy has been to ride out the downturn and experience the subsequent upturn—which may come tomorrow, next week, next month, or next year.

So, we believe that this down market may still have a ways to go. We will be patient and diligent. For those of you who have new money or excess cash to be invested with us, we will continue to buy equities on the downturn. For all clients, we will watch your overall asset allocations, and possibly sell bonds to buy equities at some points along the way.

Make no mistake: bear markets like the one we have just entered pose a real danger to your future financial health. But we believe the real and biggest danger is selling at the bottom and then missing out on the recovery.

We recognize that we are navigating volatile and uncertain times. We want to thank you for your continued confidence, and we will continue to diligently monitor the situation. In our equity portfolios, we are confident we own funds that own structurally attractive businesses, which should continue to prosper once normal business activity resumes.

As always, please feel free to contact us at any time with any questions or concerns.

Stay healthy,
Tom Zimmerman and all of us at Zimmerman Wealth Management