The Market: What's Old Is New Again
The Market: What's Old Is New Again
Wow! What a wild ride the markets have experienced the last few weeks. A jolt like this is startling when markets decide to drop so quickly, but if we choose to take a look at history, we can gain some much-needed perspective. While the last few weeks have certainly been fast and furious, the long view reveals the current result hasn’t really been all that unique…thus far. Here’s a closer look at the current markets as well as a brief discussion of how we’ll navigate this volatility in order to benefit long-term.
Stock markets are down around -15% year-to-date (S&P 500 / Wilshire 5000)
Core bond markets are up around 5% year-to-date (Core Aggregate Bond Index)
Stock Markets returned near 30% last year (2019) and bond markets rallied over 5%.
Stock market corrections of -10% or more occur on average every 8 to 12 months, and typically last about 54 days. We’re currently on day 19 since the February 19th market peak.
In the 23 market corrections since World War II, the average price drop for the S&P 500 has been 14%, according to data from CFRA. The declines normally last around 4.4 months.
Most recently, we experienced -20% declines in both 2018 and 2011 and rebounded back to high watermarks in fairly short amounts of time.
Markets are inherently capricious and will often allow temporary things (such as corona virus) to swing its mood beyond logic for a temporary period of time.
Of course, nobody ever accurately predicts how these things will play out; hindsight is always 20/20.
Our Thoughts and Actions
A -10% to -20% correction is somewhat healthy; this brings asset prices back in line and prevents excessive valuations or future bubbles in the market. With the stock markets down -15%, we are now back to a fair market value with some ‘deals’ beginning to appear (they’ve been tough to find of late).
Phase 1 Actions: At -10% to -15% declines, we take actions that include a portfolio rebalance to pick up some really solid companies that have been on our shopping list.
A -20% to -30% decline would be somewhat surprising given the currently low unemployment, strong corporate cash balances, low interest rates, and easy monetary policy. While we may experience a slowdown as a result of the coronavirus response and oil price declines, a -30% decline would most likely require a broader economic recession. We’re looking at the data as it unfolds to see if any additional cracks are forming in the economy.
Phase 2 Actions: As we approach -20% declines, we’ll place more of the cash in portfolios to work. Cash that we raised earlier this year by selling profitable positions and accumulation of stock dividends and bond interest investments will be used to strategically re-invest in now-lower-priced stocks.
A 30%+ correction is very unlikely and has happened only 8 times since 1940. However, we’re prepared to take advantage of such a decline if it should occur. We have a plan to start rotating out of low-yield bonds and move 5%-10% of these positions into the stocks of strong companies to prepare for an extreme rebound.
Opportunity and Conclusion There’s a chance that by the time you read this article we’ve already begun to see a significant rebound. Today (3-9-20) sure looks like a washout day and hopefully markets sober up and start to rebound. However, if you have cash on the sidelines that you’ve been waiting to deploy, the ride back up may be fast and furious. I don’t know how or when it will occur, but with a -15% to -20% decline already, now is a good entry point for long-term investors. For those of you who don’t have additional cash to invest or are income-takers, rest soundly that your income is being covered by the high-quality companies we own. Regardless of market fluctuations, your dividends and interest are being covered and flowing nicely. In addition to solid and rising stock dividends, many of the companies we own actually have active stock buyback programs and are placing cash to work on shareholders’ behalf at these price levels. This means that without adding a dime of new investment, you’re actively buying more shares of stock right now simply by owning great companies that have a lot of cash-on-hand. We understand that declining from market highs can be frustrating and even frightening, but the fundamentals long-term still look solid. We’re perfectly happy to scoop up deals, place cash to work, and receive dividends and additional ownership via share buybacks. Over time, we know these high-quality companies will again return to new highs.
Final Thought We believe investing is for the long run and we think you do too. It’s very rare that you or I will need all the money we have invested this year, next year, or even the next 10 years. We’ve structured our clients’ accounts and plans to support a lifetime of income and beyond. Market prices go up and they go down in the short run but inevitably grow over time. For now, we’ll do our best to ignore prices that are behaving irrationally except to take advantage of them for our long-term purposes. And what happens when we practice wise stock ownership? Let's keep in mind that the long-term result for stocks over the last 30 years has been a cumulative 1,000%+ return; not bad considering we’ve had two massive recessions, numerous big declines, and countless corrections!
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