A Dose of Perspective
The global pandemic has shocked the world and impacted every aspect of our lives, leading to sudden and far-reaching economic disruption. If you are reading this you are likely hunkered down at home, as we are, doing our best to protect ourselves and our families. You are already bombarded by news, and we do not want to add to the overload. We hope to add a more straightforward perspective on the markets, something that is often missing from the news.
As COVID-19 creates havoc in the markets, it’s easy to lose a rational perspective and let your worst instincts prevail. All the more so, if you let the news headlines du jour dominate your outlook. In that case, the sharp slide in equity prices can seem extraordinary and unrelenting.
We don’t intend to downplay what’s happening — the market’s drop has been considerable, and it could get worse. Still, it helps to step back and consider stock market history and how the current downturn-to-date compares.
The stock market’s 20% quarterly decline is one of, but not the worst, on record. Looking back to 1926, history suggests that recoveries after terrible quarters can be strong and swift, with stocks gaining, on average, over 21% in the next year. After three years, stocks averaged gains of over 36%.
Mathematical averages, of course, can be misleading. The 1920-1930 downturn during the Great Depression stands as an outlier, taking much longer to recover. Back then, the US Federal Reserve was in its infancy, and our understanding of the macroeconomy much less developed. Significant policy mistakes by monetary authorities caused a shrinking of the money supply, which greatly exacerbated the economic situation. Intervention by Congress to prop-up demand was sorely lacking, and the loss of confidence in the economy became widespread and self-fulfilling.
Our knowledge about the economy has advanced significantly in the past century, progress that continues today. One positive takeaway from the 2008-2009 financial crisis is that during a sudden and drastic drop in demand, countries can handle much higher debt loads, particularly if that debt is denominated in their home currency.
Today, governments and central banks are doing any and everything possible to support the economy. Congress passed a historic $2 trillion stimulus bill that provides direct funds for taxpayers as well as billions in support for businesses large and small. A second wave of relief could be forthcoming if needed by summer. The Federal Reserve has taken drastic measures to provide monetary accommodation, by committing to keeping rates low and opening several emergency lending facilities. There is reason to believe we can get through the health crisis and move towards an eventual economic recovery.
FIGHT OR FLIGHT
Nonetheless, in an environment like today, the uncertainty can be almost unbearable. As stock indices drop for days, weeks, or even months at a time – questions flash through our minds. How much will my portfolio decline? How long will this last? Is now the time to sell?
As sentient, intellectual beings, humans can imagine worst-case scenarios. That ability to think and look ahead kept us safe on the savannah and helped our species survive. But that same evolutionary response can breed poor decision making in the middle of a financial crisis.
We want black and white, concrete answers, when reality is more nuanced and requires a leap in faith that things will get better in time. It helps to know you have a well-grounded plan that will get you through this difficult and unusual time. A good plan is based on carefully tailored allocation strategies and broad diversification, proven risk management protocols that have protected investors for over 60 years.
The markets deteriorated before anyone knew how bad the pandemic would be, and they will start to repair the damage before anyone sees and understands that things are getting better.
As we write, small but hopeful signs are emerging. A promising vaccine is now in human testing and could be available to some patients under emergency use authorization in the fall. Italy reported the lowest new infections in nearly three weeks, while Spain also saw a slowdown in the growth rate of new infections and deaths. Some European governments are making plans to ease lockdowns. New York saw deaths effectively flat for a second day.
Most importantly, Americans are heeding the call to stay home and avoid unnecessary contact to help “flatten the curve” and lessen the impact on the healthcare system.
Regardless of how dire the news at present, bear markets don’t last forever. Economic challenges are addressed, and problems are solved. That will happen this time as well.
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