Current point of view
Here is a summary of what I’ve learned from all of the volatile markets we’ve lived through. Even though each period of volatility springs from a unique set of circumstances, there are some commonalities. The news will broadcast that “this time it is different.” At the onset of a crisis, emotions are negative, and negativity causes more negativity. There is an overriding sense of all hope being lost, that things “will never be the same again in my lifetime.” Eventually, we can’t keep up with the information. Fatigue sets in. Politicians argue. New policies, regulations and programs are announced by the government. And at some unknown time, often for no apparent reason, markets bottom out. And then markets recover. It can be proven using facts that not only have markets always come back from any volatile time period, they eventually went on to set an all-time new high. The most important point is this: markets have always come back.
The following paragraph is what I believe will happen, and the three sections outlined in green are points I want you to consider. I am certain some will agree with my thoughts and others might disagree…and in some cases completely disagree. Everyone has his or her own unique set of thoughts about the correct course of action. None of us will be completely correct: to be 100% accurate one would have to make changes every hour of the day given the barrage of information. This would be unreasonable, impractical and impossible. When this phase of life is eventually behind us, we will know for certain what we should have monitored as the best indicator to convince us we will all survive. Some might think the answer is obvious – many might think that the value of their portfolio or the stock market are the best indicators of how this will play out. Although I do not want anyone to lose money, using portfolio values or market indexes as the compass for getting through this crisis is not my preferred method for decision making.
I believe the most important data to evaluate are COVID-19 cases. This sounds like an obvious statement; however, from dozens of conversations and email correspondence I’ve had over the past few weeks, my takeaway is an extreme minority of people have any idea of the numbers, the trends or – perhaps most importantly – what we should expect as a time frame before it is likely we see positive traction. Additionally, some who agree that it is obvious we should track the virus are getting information that is far from comprehensive. If one is getting all of their information from TV or radio or (worse yet) social media, I would be shocked if they are truly informed. I am monitoring the daily and cumulative numbers of newly diagnosed cases, reported deaths, and the recovered cases, using a variety of legitimate sources. Recovered cases are those who had the virus and recovered. When you listen to any news reports, have you heard any positive news about recovered cases? If not, the data tells me that the vast majority of people do not die from this virus. Most recover. I believe about 96% of all known cases will recover – because that is what the current data is demonstrating to me (footnote: the data from about two weeks ago demonstrated about 96.5% of all cases recovered). However, today there are many who still have the virus. Why do they still have the virus? Because, of course, it takes time to run its course (as does any virus). I believe we should expect that the number of new cases will likely continue to rise for a brief period of time. I think with the drastic social distancing measures announced in the past several days, we should see the pace of new cases in the U.S. begin to decline in the next 2 – 3 weeks. Why 2 – 3 weeks? We have essentially just started social distancing, yet there are certainly people who were already infected and transmitted the virus before social distancing measures were implemented. We need to allow time for social distancing to work, and it seems reasonable to me that if 14 days is the infectious period, we might see a leveling of new cases in the 2 – 3 week time frame. Finally, take the time period of 2 – 3 weeks, and answer the most important question: will people be patient enough to wait to see a flattening of the new cases? Will we allow the likely fiscal stimulus (and already announced monetary stimulus) to take hold? Will we be able to maintain social distancing? Will we be able to filter the news that might very well be slanted toward convincing us that the “social distancing” isn’t working? Will enough people learn in the next several days that it will take some time – maybe a few weeks – for the combined timing of incubation periods and social distancing to result in an eventual flattening of the curve? In summary, do we have enough patience to see all of this through? Do YOU personally believe you can be patient – not only as a citizen but as an investor?
Considerations for the current day and intermediate term future
- Consider how much cash you have in the bank.
- Consider how much money you expect to need from your investments, and envision both the amount and timing of when you need money from your investments. Is it 3, 6 or 12 months?
- Consider how much money you have in your investments, as well as the current allocation between cash, bonds and stocks.
Considerations for the long term future
After establishing the money needed from your investments over the next several weeks or months, consider the following:
Your investments need to be managed not only for the current environment but also for the rest of your life. It is important to focus not only on the current day, but to give consideration to how much money you will need in the coming years. The majority of stock prices have decreased from a month ago, and if we were making investment decisions based on the long term, it is extremely likely investors would be buying stocks at today’s prices. Consider this: Over the past month, stock prices have declined by an average of 25%. Here is a way to interpret current stock prices: Stock prices are supposed to reflect investor expectations of future earnings – all future earnings, not just earnings for the next few weeks or months. Today’s stock prices indicate the stock market is expecting consumer spending to decrease by 25% in the future, compared to the amount of future consumer spending predicted by the stock market one month ago. Ask yourself if it seems reasonable that we will all, on average for the rest of our life, consume 25% less than what consumer spending expectations were only a month ago.
The most important points I want to emphasize:
- You likelydo not need all of your investment portfolio in the coming months to help pay for living expenses. In other words, you do not need to sell all of your investments today for the money you might need to draw over the next several weeks and months.
- You likelywill need stocks in your investment portfolio for the coming years, as it seems entirely unreasonable to me that interest-bearing investments (bank accounts and bonds) will generate enough interest to provide you both of the following: the money you will need to withdraw to live on, as well as growth to replace the money you withdraw.
If you want to make any changes, please call Weller Group at 315-524-8000.