Dear Valued Client,
Before we delve into our market commentary, we would like to start by offering our best wishes to you and your loved ones during this difficult period. The following describes how Big Sioux Wealth Management is responding to the global spread of COVID-19 and the current market environment.
While the virus is new to the world, market volatility is not. We have seen several viral outbreaks and market disruptions in the past, and markets have always rebounded.
In my 22 years of experience, I’ve been through several difficult periods, the most recent being the Great Financial Crisis in 2008 and 2009. The largest difference between the Great Financial Crisis and the COVID-19 bear market is the swiftness of the current economic slowdown and violent stock market drop. As of March 23, 2020, U.S. equity markets have dropped more than 30% in 1 month’s time (Morningstar, 2020). This event was not foreseen by even those who had been wary of the markets for other reasons. While all crises are different, one thing is always the same: they feel terrible as you live through them. However, we believe that markets, and great companies, will get through this difficult time and eventually rebound.
Currently, people are scared and concerned because it is unclear how this virus will play out. This is understandable. But one thing we know from experience is that fear and uncertainty are the enemies of successful investing. Acting on these fears can cause investors to do the wrong thing at the wrong time. While it can be difficult to stay the course, the key to investing success is to look past the current situation, while keeping your long-term plan in mind. Ultimately, that long-term view should be rewarded.
In our analysis of the U.S. economy, we are already seeing signs of an economic slowdown. A short and deep recession has become increasingly likely. However, our belief is that the spread of the virus will eventually slow down and that life will return to normal, as will markets.
On a positive note, the U.S. economy remains among the most resilient in the world. Historically, it has always bounced back from adversity. Low interest rates combined with a decline in oil prices should further support consumers and businesses. Additionally, in examining China (Worldometers.info, 2020), Hong Kong (Worldometers.info, 2020), and South Korea (Worldometers.info, 2020), virus cases appear to have peaked and are now declining. Citizens of these countries are slowly returning to a less disruptive life and business environment. We expect to see the U.S and Europe follow this pattern.
In times like these, my best advice is to stay focused on your long-term goals and stay the course. My experience leads me to believe that markets will ultimately rebound and life will return to a more normal state.
We have many additional thoughts and insights we would like to share. Over the coming weeks and months, expect to receive regular updates from our road to recovery playbook.
We are committed to doing everything in our power to deliver continued, transparent investment and financial guidance. In the meantime, we have also provided a Q&A addressing several common questions and concerns. We also invite you to contact us with any additional inquiries that are not addressed in the Q&A. Most importantly, we wish you and your family good health and safety as we persist through these difficult times.
Dustin Padgett and Your Team at Big Sioux Wealth Management
Q & A
Q: Is it too late to sell?
A: In our view, it is likely too late. Markets are forward-looking and we believe that much of the bad news is presumably priced into the markets. Markets tend to overshoot both in periods of euphoria and slumps, although downturns can often be more dramatic. Mutual funds and ETF’s have been forced to sell shares to meet redemptions, which has helped to fuel the vicious cycle of selling. Equity markets are down in excess of 30% over the previous month (Morningstar, 2020). Although the COVID-19 outbreak is largely unprecedented, if you feel you would like to move your portfolio to a more conservative stance moving forward, we understand. However, it may be wise to wait until markets rebound, as selling at a steep loss can cause significant damage to your long-term returns. Equity markets may go lower from here, but our advice is to avoid panic and to remain calm.
Q: Is my money safe? Can I lose all my money?
A: Portfolio returns and drawdowns are dependent upon how much risk you are taking within your investment portfolio. A simplified way of determining your risk level is to consider what percentage of your investments are stocks versus bonds. Historically, stocks have offered higher potential returns than bonds, but also carry significantly more risk. However, if you are invested in one of the models we manage, you are broadly diversified in many different stocks and bonds, spanning nearly every business industry. For example, if our model were to hold an airline that went bankrupt, it may slightly hurt your portfolio because it is one of many holdings. Alternatively, if your only holding was the airline that hypothetically went bankrupt, you would lose your entire investment. Through broad investment diversification, as well as frequent portfolio updates, we aim to limit your investment losses as much as possible. Additionally, we view our banking system as well capitalized and strong. Especially compared to 2008 and 2009. On top of being stressed tested for environments such as this, the Federal Reserve has stepped in to provide liquidity to banks, as well as money market funds, and a wide spectrum of bonds.
Q: When will the market bottom?
A: We do not know. Anyone who tells you that they know is not being truthful. There are many factors that will determine the turning point for equity markets such as: the duration of the virus spread, mandated business closures and quarantines, as well as the potential upside of the incredible monetary and fiscal stimulus unfolding. Here is a list of additional items we are closely monitoring that we believe will help us to better understand when we may see a turning point:
- Equity and bond market liquidity, especially bonds
- New U.S. COVID-19 cases. An eventual downward trend will be viewed as positive
- Fiscal policy from Congress
- Investor sentiment. Once markets stop declining heavily upon bad news, it may indicate that selling could dry up
- Advancements of a deal with Saudi Arabia and Russia on cutting oil production would be viewed as constructive
- Insider buying among corporate executives buying back their own stock. This could provide an indication that businesses’ outlooks are changing for the better
- Consumer confidence, while closely watching consumer behavior
- If we see a U.S. recession, we will examine the visibility and severity
- China’s economy and markets. Their market and economic rebound (or lack thereof) may provide us with clues of how U.S. markets may react once COVID-19 cases begin to decline
- Coronavirus treatment success rates
- Duration and rollback of U.S. international travel restrictions
(2020, March 24). Retrieved from Morningstar: http://quotes.morningstar.com/indexquote/quote.html?t=0P00001G7J®ion=usa&culture=en-US
(2020, March 24). Retrieved from Worldometers.info: https://www.worldometers.info/coronavirus/country/south-korea/
(2020, March 24). Retrieved from Worldometers.info: https://www.worldometers.info/coronavirus/country/china-hong-kong-sar/
(2020, March 24). Retrieved from Worldometers.info: https://www.worldometers.info/coronavirus/country/china/