As I shoot this video we are in the midst of a big selloff stemming from the Coronavirus and an oil price war between Russia and Saudia Arabia. The market has dropped 25% from its recent highs. To get through difficult markets, you must take fear out of your decision making process. Instead, focus on fundamentals and history. As of today the economic fundamentals look strong, but will that last? Will we have a quick recovery, or is stock market volatility here to stay for several months? Will the consumers stop spending money and send our economy into a recession?
So today I want to give you the clarity and perspective I can through my latest Market Update video.
Script
Hello everyone. I’m Doug Pardieck, an independent financial advisor with Talon Wealth Strategies. Along with my team of very experienced advisors, we’ve developed a finely tuned process for helping you grow your wealth and protecting it for your entire life and beyond.
As I shoot this video we are in the midst of a big selloff stemming from the Coronavirus and a oil price war between Russia and Saudia Arabia. The market has dropped 25% from its recent highs. If we look back over the last 5 years you’ll see we had a similar drop in late 2018, followed by a quick recovery.
The selloff during that time had a lot of folks predicting the coming of the next recession. The fed was raising rates in 2018 and that made the market nervous. However, the economic fundamentals that matter were collectively positive, and the stock market rallied. As of today the economic fundamentals look strong, but will that last? Will we have a quick recovery, or is stock market volatility here to stay for several months? Will the consumers stop spending money and send our economy into a recession?
So today I want to give you clarity and perspective. Let me start my letting you know I do not know what the next week looks like. Nor do I know where the stock market will be in the next 6 months.
I do know that our process works. I do know the strategies that were sound 4 weeks ago are still sound right now. The price you see in the market today is not your price, unless you sell. Don’t sell something that’s valuable for a cheap price.
Managing your assets during difficult times is like flying a plane. When flying an aircraft in heavy turbulence you keep focus on the horizon.
While the dashboard of instruments are spinning out of control, you look directly out the window and focus on the horizon. You sit up straight, grab the yoke, maintain airspeed and heading and you get through it.
To get through difficult markets, you must take fear out of your decision making process. Instead, focus on fundamentals and history.
I want to take a moment and remind you of our process and how we take care of your wealth.
Your entire investable assets are separated into Buckets. If you’re still saving an accumulating, you may not have buckets 1 & 2 funded quite yet. But, for those of you who are near retirement or in retirement, you do have plenty of money in buckets 1 & 2. The investments in these two buckets are carefully selected to lower the risk of volatility. While buckets 3 & beyond are participating in this market selloff, those investments are being carefully watched and rebalancing is taking place. We are looking for bargains, not the bottom. As of March 6 2020 both bucket 1 and bucket 2 portfolios were positive for the year. How would it feel if you knew you had 7-10 years of distributions covered by portfolios that are withstanding the current storm?
Your short term goals should have zero exposure to stocks. Our bucket 1 portfolio has zero exposure to stocks and is designed to cover your expenses over the next 5 years.
Let’s talk about the portfolios with a good amount of stock market exposure. Yes, those have been hit hard and they need time to heal. If you are in your working years and retirement is over 10 years away, you have plenty of time to put this crisis in the review mirror. This is why you need to have a fully funded emergency fund. Your emergency fund and your income will take care of you while your portfolio recovers.
In this chart you see how long it took for 3 different portfolios to recover from the financial crisis that began in late 2007. Stocks took 5 years to recover. A blended 60/40 portfolio took 3 years to recover. A blended 40/60 portfolio took 2 years to recover. This is exactly why we have a Bucket 1 with a goal of preservation. And our bucket 2 portfolio on has roughly 30% exposure to stocks. Does your financial plan give you this level of certainty and confidence?
Remember the Great Recession? I do and there were valuable lessons learned as an investor back then. Focus on the blue circle. As investors we were in the middle of a quick and dramatic crash in the value of stocks. My training told me to hold my shares of good stocks and not to sell. Unfortunately, I personally did not have a lot of money to buy more. I knew that I wanted more shares before the prices went up again. Luckily, many of my holdings had dividends that were reinvesting and buying more shares. I told myself that my share count was increasing faster while the prices were low and that this would lead to more wealth and prosperity once I got to the other side of this crisis. I was right.
Back then, the economy lost nearly 9 million jobs and the unemployment shot up to around 10%. The average household was unhealthier back then. Corporations and banks were less capitalized back then. Going into this current crisis, our economy is on much better financial footing. That fact should not be lost on us as we endure this crisis. I’ll get back to this in a minute.
This chart illustrates the volatility of the stock market. We invest in the stock market to grow our wealth over time. However, the price to pay for potentially higher returns is to endure volatility. We created an entire video on this topic which you can find on my YouTube channel or on my website. You’ll notice each year has a final return. For example, in 1980 the S&P 500 return for the year was positive 26%. Despite a very good return the S&P did drop -17% during the year. From 1980 – 2019 the avg intra year drop is 13.8%. Some years it’s less than the avg and others it’s more than the average, but drops greater than 10% are normal and should be planned for.
Corporate cash levels. Going into this significant market sell off the economy was on solid footing. Corporate earnings and corporate cash levels have been healthy. U.S. unemployment is down below 3.5%, which is historically very low.
The U.S. consumer’s finances are relatively strong. Focus on the chart in the upper right: Household debt payments as a percent of disposable income in near historical lows. Much healthier than 2007, just before the big financial crisis.
Going forward we can expect the number of infected US citizens to increasing significantly. It this the Spanish Flu of 1918? No, not even close, in my opinion.
We expect corporate earnings to be hit hard and this will show up in the 2nd qtr earnings reports. We expect the U.S. GDP to slow down to near zero by this summer. Will we enter a recession? The simple answer is “I don’t know” and no one else knows either. I’m hearing compelling cases for a coming recession and others saying this will all be behind us before it get’s that bad.
Let’s look at some previous virus outbreaks to provide some historical context.
The Asian Flu hit the US in late 1957. Almost 70,000 Americans died during this outbreak. The economy suffered short term, but then quickly rebounded.
The Hong Kong flu hit the US in September of 1968. 34,000 American died, yet the economy continued to grow. Slide 15: The swine flu or H1N1 virus hit us in 2009 just as we were coming out of a recession. An estimated 12,000 Americans died, yet the economic recovery continued and the S&P 500 finished the year up 23%.
Have you seen the animated movie from Disney called The Incredibles? It’s about a family of superheros. There’s a scene where the mom and two kids are plummeting towards earth after their plane blew up. On the way down the kids are screaming for good reason. But the mom, Elastigirl, voice done by Holly Hunter, who’s obviously a well-seasoned superhero herself remains calm and says with great confidence, “We’re not going to panic” and she get’s them all to safety.
While I’m not technically a superhero, I am here to say with great confidence, “We’re not going to panic!” Panic is not a successful strategy. Why am I optimistic the markets will rebound and we will eventually get back to all time highs? Because it would be irrational not to be. Good companies will endure. First of all, we began 2020 in good shape. The economic numbers even through February look very good. The job additions in January and February were solid. Housing starts in December and January were the best back to back numbers since 2007. Wage growth is doing well. Our Service Sector, which is roughly 84% of our economy, just released its economic number and it jumped up to 57.1, an indication of true expansion. Now that the virus is impacting the economy, we expect the economy to slow down, but only temporarily.
If you are close to retirement or in retirement, make sure your Buckets 1 & 2 are fully funded, giving you ample amount of cash flow without requiring you to sell your good investments while the prices are down. If you are still working and saving, make sure your emergency fund is fully funded.
Short term volatility does not change the financial plan. I don’t know what the market will do next week, let alone the next 3 months…. But I do know the strategies that were sound 4 weeks ago are still sound right now. Keep your focus on the horizon. There are great days ahead of us.
Please call me. I love hearing from all of you. Again, my number is 303-951-5987. We do comprehensive financial planning for our clients, giving you peace of mind, allowing you to sleep easy at night.
Take a deep breath. Have good faith in the process. We are going to be fine. Talk to you soon.
These opinions of Doug Pardieck are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized advice. Indices mentioned are unmanaged and cannot be invested into directly. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Talon Wealth Strategies are not affiliated.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Talon Wealth Strategies are not affiliated.