Navigating Unprecedented Times
“Everybody has a plan until they get punched in the mouth” – Mike Tyson, Retired Professional Boxer
Truth be told, we never thought we’d be quoting Mike Tyson. And while it’s unclear whether the colorful boxer actually uttered the above quote, the sentiment lends itself to the current market environment. However, the idea that “strategy ends when combat begins” should be met with skepticism and opposition. Markets like the present are not a time to abandon one’s plan but rather to stay the course while maintaining flexibility and remembering the goal(s) at hand. When met with market adversity, we should stay anchored in our game/financial plan. This message is more important now than ever, given the markets are, in a lot of ways, a test being run in real-time. The range of future outcomes is extremely wide and due to this uncertainty, the markets have exhibited the most volatility since World War II. We have no better insight into what letter of the alphabet the market recovery will look like (e.g. V, W, U, etc.), but rest assured we are working hard to move our clients in a forward direction.
If there is one word we’ve heard more than any other over the past month it has been “unprecedented”. We couldn’t agree more. This period of market history will be one that is unprecendented. The world has never seen this script where commerce and lives have been halted due to government fiat, where orders to “social distance” and “shelter-in-place” are issued in an effort to protect people at the short-term detriment to capitalism. The economic impact of these measures have caused historic levels of new unemployment claims and slowing global growth, and an unprecedented response by the federal government and Federal Reserve. Interestingly, social distancing in many ways has dislocated business fundamentals as much as it has people. And it is important to keep in mind that all bear markets (including 1987’s Black Monday, the Tech Bubble, or the Great Recession all felt unprecedented and scary at the time). It’s only once the markets have turned the corner to recovery (note: all prior bear markets have ended) that in hindsight everything appears rationale and obvious.
This perspective is important, as it can provide some historical context with which to re-orient ourselves towards the tenets of investing that have held up through prior market shocks—Great Depressions, World Wars, Black Mondays, Tech Crashes, etc. Coronavirus and its impact on markets is unprecedented given its recessionary effects while markets experienced no real supply and demand imbalances prior to the virus. What we do know is that the virus will be managed and recessions do end, and we are confident investors will be happy that they stuck to their game plan. And it’s important to remember the long-term nature of market events as reflected in the Morningstar chart. 2008’s Great Recession lasted 16 months from market peak to trough. In fact, looking back at other recessionary environments, 16 months tends to be the average length of time for a recession since the Great Depression. While it can take several years for the markets to return to their previous peak, it’s important to realize that the expansion from the market low’s has historically provided significant upside given the reset in valuation levels. Stated another way, while the market declines never feel good on the way down, markets decline by fractions, while rebounding in multiples.
As valuations reset and investors become more optimistic, the markets typically lead the economy. We would expect nothing different this time around. Once cases of COVID-19 plateau and the market understands the baseline of macro economic figures (unemployment claims, retail sales, corporate profits and earnings, etc.), markets discount this information and can start the process of moving higher.
While the economic numbers in the near term likely will be ugly, JP Morgan recently reported that since 1928—which includes 14 recessions and 21 bear markets—equities have always recovered beyond their prior peak. By JP Morgan’s estimates, even if it takes 5 years to recover to the prior market high hit in February 2020, investors will earn an 8% compounded annual return on the S&P 500. If that rebound comes earlier than many market prognosticators think, the rewards for long-term investors will be considerable, and come even faster. While history may not always repeat itself, this is important information to keep in mind as we consider the markets within the context of your financial plan.
For its part, Goldman Sachs recently reported on how this recovery could look. While we don’t profess to predict how the markets will recover, Goldman reviewed every bear market since 1800. They bucketed each market downturn into the three exhibited trends — cyclical in nature, structural, or event-driven. At this point we believe Coronavirus falls into the event category, but time will tell if we stay there. Goldman’s study also showed that event driven bear markets are shorter in duration and tend to rebound more quickly. If the speed of the downturn is any indication, we could be on the path to a quicker rebound if the timeline plays out.
Although the coronavirus might have punched investors in the mouth, we reject Iron Mike’s thinking. We’ll continue to stay flexible, seeking to take advantage of compelling market opportunities when they present themselves, rebalance portfolios to maintain asset allocations, and tax loss harvest accounts to offset taxable gains and defer taxes.
As always, we wish to thank each and every one of our clients and friends for the trust and confidence you place in us. We come to work (or our respective quarantined room in our homes) with a passion to help make your dreams a reality. This is a responsibility we don’t take lightly. And we hope you will consider recommending us to like-minded family and friends who could benefit from Madison’s holistic and steady-hand approach to wealth management during this volatile time.
Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2020