On May 13, 1940, Prime Minister Winston Churchill stood before the British House of Commons as their French neighbors were being overrun by the seemingly unstoppable Nazi advance.
“We have before us an ordeal of the most grievous kind. We have before us many, many long months of struggle and of suffering. You ask, what is our policy? I can say: It is to wage war, by sea, land, and air, with all our might and with all the strength that God can give us…” – Winston Churchill
A few months later the Nazis began the “Blitz” in which they bombed London, day and night, for 57 straight days. Historians have noted the indominable spirit of the British people during this time. They got on with life and the war effort. They treated bombing attacks like the weather with statements such as, “It’s rather blitzy today.” What an amazing example of mental fortitude! And through it all they persevered and prevailed.
Our own nation boasts a colorful, distinguished history of action in crisis that has proven time and again the American people will likewise persevere, triumph, and prosper. Today we face a terrible health crisis. With the stock market experiencing significant volatility in recent weeks, economists have begun comparing the current market to that of the 2008 financial crisis. While times are tough and very uncertain, there are some distinct technical differences between these two periods of stress.
So far, the impact on the market has been less severe than the 2008 crisis. Stocks have fallen approximately 30% from their peak, compared with a 59% peak-to-bottom during the 2008 financial crisis. However, the most important difference is that the previous crisis derived from systemically bad practices within our financial system. Today our banks are on very good footing—the negative influence is from outside the financial system in the form of a health crisis. The current situation is bad, but the financial system that must bear it is much stronger this time.
Keep in mind, we are speaking strictly from a stock market standpoint. As a local financial institution serving numerous business owners, we are very aware many small businesses around the country will not recover from this disaster. Our prayers and thoughts are with those most severely affected.
What are we doing today?
Within our organization, we have been studying the growing probability of a domestic market decline for quite some time. (Some of you have even expressed growing weary of hearing about it!) What none of us could have predicted was the specific triggering event, and this global health crisis has been just that. As stocks decline and bond prices rise, imbalance develops in each portfolio. Our trading team is working diligently to make incremental rebalancing trades, carefully selling appreciated assets and buying those which are most depressed. As you can imagine, trading and implementing in this environment is no easy task, but we have systems and processes that allow us to take advantage of the day-to-day activities of the market. We believe our approach will be advantageous to investors in the long run.
We will continue to monitor global markets daily and, depending on how markets respond to this pandemic, it is possible more portfolio changes are to come. Thus far, this market decline has not brought us to the same valuation levels seen in 2008; but while we cannot forecast further decline, we cannot rule it out either. The market would need to fall further to reach the lowest valuations seen in early 2009 (based on price-to-book and cyclically adjusted price-to-earnings ratios). This is not a perfect forecasting method, but it does give us some context and expectations regarding what is possible.
What can you do?
In times like these, it is more important to focus on what you can control rather than dwelling on fear and other emotions. You might be asking, “What can I do so my long-term goals are not compromised?” Here are a few items to consider:
- If you have excess cash sitting in a bank account or Money Market, you may want to consider taking advantage of this global market decline to incrementally buy at low prices. Warren Buffet once said, you’ll know it’s the right time to buy when it gives you a knot in your stomach.
- Re-examine your risk tolerance and review your Investment Policy Statement. If you were conservative with your risk allocation prior to this decline, now might be a good time to adjust to a slightly more aggressive stance and buy while prices are down. I do not recommend extreme shifts, but even a 10% bump will have a long-term impact.
- If you have a 401k held outside of your advisor’s purview, be proactive and provide him/her with a statement so they can review your holdings. It might be a great time to rebalance and take advantage of the decline.
- If you have concerns regarding your financial plan, schedule an appointment with your advisor to examine how this decline has impacted your long-term goals and confirm your On Track status. I recommend doing this by phone or waiting until the social distancing period is lifted.
Remember, the current market distress is most directly related to the uncertainty surrounding the future of coronavirus, not our economic strength. The level of uncertainty will continue to create unpredictable market behavior, and due to how many small to medium sized businesses are being affected across the country, a recession may result. Don’t be shaken by this. Recessions come and go like bad weather. We expect them and, for this reason, your financial plan has been designed to withstand them.
We encourage you to consider the many crises our nation has endured and overcome, many of which have occurred in your own lifetime. The current crisis is simply another test. This country was not forged by the hands of people who huddled by the comfortable hearth of civilization, but by pioneers who pushed the envelope of human achievement, daring to face every obstacle—imagined or otherwise. No one anticipated our next great challenge would be a virus, but it doesn’t matter. We have conquered every threat of nature or man to come against us and we will continue to do the same, because that’s what we do.
Ben Messinger, CFP®