Ten weeks ago, we wrote the “Don’t Panic” article. At the time, the S&P 500 had fallen nearly 13% from its February 19th all-time high. That article didn’t age well initially, considering the S&P continued falling (and falling some more) before bottoming out on March 23rd. All told, the S&P fell nearly 34% from its high before beginning its ascent to where we find ourselves today: Back to the level it was when we shared the “Don’t Panic” article.
Well, I need to come clean about something: I panicked. Heart racing, palms sweating, eyes darting, PANIC. And to think I had been doing so well until that moment—when sheer terror suddenly overwhelmed me one evening right before bedtime. Down 10%? Oh well, stock prices are volatile in the short term. Down 20%? Yep, we were probably due for a pullback. Down 30%? Get me off of this ride! That was just too much to take, and here’s why: My wife and I had made some material changes to our investment portfolio over the past year or so, which had the effect of dialing up our exposure to riskier securities in order to be more in line with our investment horizon and objectives. Basically, we bought at the top. Okay, that might be an exaggeration, but I rely on exaggerations in panic mode.
As an investment professional, I should have seen this coming, right? In the eleventh year of an economic expansion, surely we were due for a heretofore unidentified virus originating in a far-off land to spread globally, infecting millions, and bringing commerce to a standstill. Clearly, I was asleep at the switch. Okay, the truth is, no one had the “shelter-in-place” order as their base case outlook for 2020. Economic shocks come from all angles. As Ty says, we don’t predict the rain; we build arks.
The financial advisors at HFG Trust have been cool, calm, and collected in the face of these turbulent market conditions. Most of them guided their clients through the last major stock market upheaval in 2008-2009, and that showed. Having only recently joined in December, I was still an HFG Trust outsider when the markets started falling precipitously in late February. I learned a lot during my years working on a bond trading desk in New York City, including how to properly panic. In 2008, there was no shortage of yelling, emergency meetings, and perhaps most notably, smashed phone handsets. Come to think of it, while there had been many advances in the technology and hardware available to trading personnel over the years, that heavy, black, hard plastic phone handset never changed from the days of Bud Fox in the movie Wall Street. Like sharks, those handsets had evidently reached peak evolution long ago. Seeing highly accomplished and well-paid bond traders smash those phones to smithereens left an impression on me.
That was then. Now, I much prefer the calming influence of our team of financial advisors here. On one crazy Monday morning when stock prices were down more than 5% on the day, I attended the bi-weekly financial advisor meeting with a page of hastily prepared talking points highlighting the reasons for the massive intraday decline and its key takeaways. No doubt, they’d be calling on the new guy with the Bloomberg terminal to give his two cents. Nope—it was just a normal meeting. Maybe if there had been heavy black plastic phones laying around, it would have been a different story, but likely not. Once the meeting broke, I stopped an advisor in the hallway and tried to maintain a cool demeanor while telling him that alarm bells were sounding in the great financial capitals of the world and that stocks were crashing hard! His response? He knew. That’s it? He knew?
I became an HFG Trust insider that day. It simply makes sense. Did my wife and I make any changes to our investment portfolio in reaction to the wild swings in stock prices? No. We have a plan and we’re staying the course. Besides, if you sell in fear on the way down, when do you get back in? Would you have been forward-thinking enough to get back in already? Would you sell now because company valuations screen high relative to their shrinking earnings expectations? After all, the economy is clearly not out of the woods yet. The debate about the shape of the recovery has been shifting from V-shaped to L-shaped with each passing day of restricted economic activity. Could the March 23rd lows be tested again? Maybe. But stock prices have a remarkable way of incorporating future expectations, including the anticipation for a slow healing process, which it will be.
A changed world awaits us. But there happens to be lot of things to like about the old world, and I personally can’t wait to help lead our community’s return to normal. My reasons are threefold: 1) Living in fear is not an option; 2) local businesses have made this a great community and are worthy of our support, and 3) my wife and children have been cooped up long enough! We’re all going out to dinner the day restaurants open their dining rooms again. I hope to see you out and about as well.
Anthony Smith, CFA