We wanted to share with you our thoughts regarding the past few days of the stock and bond markets. We would also like to share where we think markets may head from here.
The US Stock Market has now entered a bear market, which by definition is a decline of over 20%. This decline began on February 12th, just 28 days ago. In 2019 we saw the S&P 500 increase by 31% and now some (but not all) of those 2019 gains have been eroded in this Coronavirus fueled market decline.
There have been only 12 bear markets since World War 2. The current decline represents the shortest number of days it took for the market to decline 20% out of all 12 declines. In other words, not only is a 20% decline unusual, this one in particular has been the fastest of them all.
When investors sell stocks out of fear they will often put the proceeds into ‘safer’ investments such as bonds. While bonds come in many shapes and sizes, US government bonds in particular are believed to be safe investments. Bonds are not immune to volatility, but are historically less volatile than stocks. For investors that need funds from their portfolio during times of stock volatility, consider selling from bonds or take from cash. If you are looking to take advantage of a stock market decline, think about selling bonds and rotating the proceeds into buying stocks.
Each client portfolio is customized for the client. Age, risk tolerance and withdrawal needs are all factored in to how your portfolio is customized for you. During volatile times like this, each client portfolio should be adjusted differently. Generally speaking, younger clients will have a higher allocation to stocks and generally speaking clients close to retirement or in retirement will have a portfolio balanced in some way between stocks and bonds.
For example, a client more than 10 years from retirement will see a market correction like this as a terrific buying opportunity for stocks. After all, stocks are 20% cheaper today than they were just three weeks ago. That client, far away from retirement, is not worried about where the stock market will be two months from now, they believe that buying stocks today will help them grow their long-term wealth. They maintain a long term perspective and likely don’t worry about short term fluctuation.
A client that is already retired or close to retirement is likely more concerned with short-term fluctuation. They are more likely to have a sense of worry as they are withdrawing funds regularly from their portfolio during a period of market stress. To protect against selling low, the client portfolio is likely well balanced between stocks and bonds. We often refer to ‘buckets’ where the client will take their money from bonds (the conservative bucket) and not sell stocks (aggressive bucket) during times of volatility.
What we think will happen next
It is unlikely the coronavirus will go away soon. We could have several weeks or months ahead of market volatility as investors digest news of the spread of the virus and how communities and corporations respond. There is no doubt many corporations will have their future earnings hurt and their stock prices will reflect this expectation. Stock markets do not like uncertainty and the recent stock sell off has a hint of overreaction and panic to it. We believe these stock declines will be temporary and prices will recover once the virus subsides and business is back to usual. We fully expect the Federal Reserve to step in immediately to provide assistance to the banks of our country and for our Federal Government to step in to provide everything from tax breaks to health care support for those who need it. It will be all hands on deck from the public and private sectors until the virus passes and the economy returns to normal.
Each bear market is different yet it remains the same. We can reflect back on the dot com bubble of year 2000; the financial crisis of 2008 and 2009 or even the sharp decline just 16 months ago at the end of 2018 when the United States and China threatened trade wars. In each of those instances, as bad as it felt in the midst of it, the markets rebounded and eventually moved higher. The key for investors in each of those declines was to stay disciplined and not do anything foolish. Easier said than done, but it is our job as your advisors to listen to your concerns, review with you the diversification of your portfolio, remain patient, stay disciplined and make adjustments that could benefit you in the short-term as well as long-term.
With the decline in stock prices, portfolios are experiencing drift. For example if a portfolio was targeted to be 50% stocks and 50% bonds and the stock market declines by 10%, then the portfolio has drifted from its target allocation. Rebalancing your portfolio, especially during volatile times, may be appropriate. For our clients, we’ll be touch when that time comes.
Please do not hesitate to reach out to us with your questions and concerns. We’ve been through corrections and bear markets before and while each time is different we know over time this too shall pass.
Matthew A. Somberg, AIF®,CLTC®
Co-Founder and Principal
Accredited Investment Fiduciary®
Gottfried & Somberg Wealth Management, LLC
148 Eastern Blvd. Suite 201
P.O. Box 776
Glastonbury, CT 06033