During the first quarter, we witnessed history in the making. The S&P500 had the fastest bear-market decline (20% drop from a previous high) since 1933 and the S&P500 lost over one-quarter of its value in 16 trading days. As this chart from Bespoke Investment Group depicts, for periods outside the depression, the average time it takes to reach these sorts of declines is 124 trading days. In other words, it typically takes over four months to reach bear market levels. This time, it took three weeks.
In our previous quarterly commentary, we shared our views regarding market complacency and discussed how “a series of unexpected data points, surprise developments or an exogenous shock can trigger a change in market psychology.” Well, the market complacency has clearly been shattered—which in time should create future opportunity for market participants. The level of uncertainty today is extremely high as evidenced by the wild swings in market prices over the past few weeks. The peak to trough returns in the S&P500 has already exceeded the 30% average decline during a recessionary period. But, given elevated volatility and so many unknows, any reasonable attempts to pick the market bottom could prove foolish. We prefer to use the market weakness to upgrade portfolio quality, tax harvest losses and ensure portfolios remain aligned with your unique set of goals.
Source: Bespoke Investment Group
Withum’s Jim Ferrare, Managing Principal of Withum Wealth, predicted a bear market for 2020 a few months back in this interview with ROI-NJ where he warns readers to exercise caution. It appears Jim’s prediction is ringing true… for reasons no one would have imagined.
Headlines of Coronavirus fears and oil price wars sank the stock market, experiencing its worst day yesterday since 2008. While this creates obvious concerns, don’t panic yet. In my previous article published on January 6, “An Interesting Start to 2020,” I shared that “unexpected data points, surprise developments or an exogenous event can trigger a change in market psychology… [and] 2020 may be the year where patience and opportunistic investing play a welcomed role in investing.” This may be proving true now. The magnitude of the recent sell-off and the likelihood of excess upcoming volatility could lead to potential rewards associated with portfolio repositioning and tax harvesting. Should the pace of this sell-off extend a few more sessions, long-term investors will soon have their first attractive buying opportunity since December 2018.
We want to ensure your investment portfolio remains aligned with your goals and objectives. The Withum Wealth team offers portfolio reviews at no cost. There is absolutely no commitment or fees for this service. At a minimum, you will have a better understanding of your portfolio’s sensitivity to the market, including all-in fees (as well as embedded fees), performance and tax harvest opportunities. Feel free to reach out to me at firstname.lastname@example.org or by mobile at (917) 364 4950, or speak directly with your Withum team members about how Withum Wealth advisory services can be beneficial to your financial wellness.
Point drops are headline grabbers but are also somewhat misrepresentative, as the market was at near all-time highs only a week or so ago. The sell-off did help contribute to the fastest 10% correction ever— just six days—and that created a legitimate concern as to what may follow. The news flowing out of the weekend is adding to both market and individual jitters. The first coronavirus case reported in NYC, the second death in Washington state and the ten-year US Treasury yield flickers slightly above 1%– confirming in our view a demand-induced slowdown is inevitable.
We were surprised at how well the market held up in January following the Iranian military strike and the initial reporting of the Coronavirus (COVID-19) outbreak. Any market complacency that existed during the first six weeks of the new year is broken—and there are some positives to that.
The rapid expansion of the COVID-19 virus to South Korea, Italy and Iran seem to have caught market participants off-guard. In addition to confirmed cases in California, the World Health Organization raised its risk assessment to “very high,” which seemed to be an additional selling catalyst.
We think it is possible COVID-19 could lower near-term earnings closer to 2018 levels —a far stretch from the rosy 2021 estimates that were forecasted only a few short weeks ago. Entering this correction, the S&P 500 index was trading at 19 times forward earnings, while historically, that multiple is closer to 15 times. From a simplistic approach, assigning a slightly more modest multiple of 17 or 18 times to 2018 earnings would produce an S&P 500 price level range of 2737 to 2898. The intraday low for the S&P 500 on Friday was 2856. A 20% decline from the previous market high would be approximately the 2700 level. Perhaps we are getting closer to some type of bottom.
The main takeaway is that significant market erosion has already taken place-$3.2 trillion of market value vanished in the week ended Friday. For long-term investors, especially those that believe in the benefits of staying on-plan, rebalancing and situational tax harvesting may prove a better strategy than attempting to zig in and out of bouts of market volatility. Investors with cash reserves ready and willing to deploy may consider dollar-cost averaging into this current sell-off. This is a new decade with a different set of opportunities and obstacles.
It is prudent to expect a continuance of extreme market swings through 2020- in the volatile times, the market is far from a rational voting machine. The Federal Reserve may decide it is in their best interest to mobilize the G7 leaders or act alone and provide an “insurance” interest rate cut—which seems to be baked into the market. Some may find this reassuring, others less so. Should the stock market volatility or decline continue, the uncertainty involving the outcome of the 2020 Presidential election may heighten. Politics aside, history suggests many people vote based on the health of the economy, and stock market.
In the short-term, trends, forecasts, fundamentals and market psychology are subject to wide variances. We believe the financial markets do a good job in the long-term of tracking sustainable economic trends and underlying fundamentals. We remain bullish on future economic growth and optimistic that prudent health care measures and the brilliance of our global healthcare industry will significantly reduce the risk of COVID-19 over time. Market complacency has been broken, and should the pace of this sell-off extend a few more sessions, long-term investors may soon have their first attractive long-term buying opportunity since Christmas 2018.
We believe the magnitude of the sell-off, likelihood of excess upcoming volatility and potential rewards associated with portfolio repositioning and tax harvesting could make a portfolio “checkup” a rewarding exercise. Jim and the Withum Wealth Management/Pinnacle team offer complimentary portfolio reviews.
If interested, please reach out to Jim directly to begin your complimentary portfolio review process. Our goal after the portfolio review is to give you a better understanding of your portfolio’s sensitivity to the market, all-in fees (including embedded fees), performance and tax harvest opportunities.
We recognize during periods of uncertainties routine life can become challenging. The spread of the virus will, unfortunately, get worse before it’s under control or until the development of a vaccine. We wish everyone the best of health during these times and that the global outbreak is controlled and eradicated as fast as possible.
Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Withum Wealth Management. [“WWM”] or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article/newsletter serves as the receipt of, or as a substitute for, personalized investment advice from WWM. Please remember to contact WWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. WWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the WWM current written disclosure statement discussing our advisory services and fees is available for review upon request.