From Feb 24 – Feb 28th the S&P 500 was down 12%, taking us back to levels last seen this past October. For perspective, the stock market drops about 10% every 11 months on average, so while 12% may seem like a blip on the radar, the velocity of the drop is what concerns investors. Last weeks drop was the fastest 10% drop seen in about 40 years. Like you, we feel the emotional tug when the stock market drops fast, but we know it’s part of the long-term investment process. So what exactly is going on?
The news about the coronavirus and the lack of understanding of how it will impact our global economy is leading to strong sell-offs and increased volatility. You can read more about what’s happening here. Many companies are reporting slowdowns and disruptions that could take 6 to 9 months to recover from. This could lead to significant reductions in production and ultimately earnings. The market will almost certainly reprice to lower expected earnings in the short-term, even if long-term earnings aren’t impacted. This is what we are already seeing today. The anticipation of lowered revenue and earnings guidance for 2020 is driving markets lower. For now.
Some may ask, why not sell and go to cash? The short answer, we are long-term investors and we don’t believe the market can be timed productively enough to earn returns greater than a good portfolio that avoids attempting to time the ups-and-downs. In-fact, as I write this, the market is back up by about 2.5%. Just yesterday futures were telling us the market would be down by over 3%. Timing the market is very difficult, it costs investors in taxes, fees, and more than anything missed gains when the market rebounds. Our clients understand this and have investment portfolios that are risk-appropriate to their financial plans.
It’s worth noting, when markets are down, we do not bury our heads in the sand, we review client portfolios and financial plans to make sure everything is reacting the way it should be. Still, it’s important to think like investors, not traders. The odds a market will be up on any given day is 50%. The odds the market will be up over a year improve to two-thirds, and the odds that the market will be up over a 10-year period is over 90%. It’s not about timing the market, it’s about time in the market.
If you haven’t reviewed our investment philosophy recently, now is a good time to review it and ask any questions you may have. Read our Investment Philosophy here.
Our solution is to build financial plans which contain investment plans that will maximize returns over the long run, while putting clients in a position to accomplish their financial goals even in down markets.
We don’t have a crystal ball as to which direction the market will move from here, what’s important is that you understand your financial goals and the role your investment plan plays in reaching those goals. We will continue to stay on top of the various concerns that impact markets, whether it’s the coronavirus or political happenings. If you have additional concerns, we are just a phone call away. Remember, it’s not about timing the market, it’s about time in the market.