Humor me for a minute and picture the following scenario –
It is January 1st, 2020 and you are talking with one of your friends who’s portfolio has been 100% cash since 2017. You ask them whether they want to buy some stocks and they reply that “prices are too elevated” and mumble something about some ratio.
Now, fast forward to late March 2020. Equity markets have experienced their fastest selloff ever, with stocks down 30% (or more) off their highs across all the major indices.
You call up your friend asking whether it is now the right time to buy stocks. Despite being flush with dollars, your panicked friend responds, “Oh no. I am going to wait for things to settle down”. Only 12 trading days later, the Dow is 26% above its March 23 lows, yet your friend still remains in cash. At this point, the question you really want to ask (but don’t) is: Have things settled down yet?
Not only did this individual miss the rally in 2019 but they also missed the beginning of the comeback story in 2020. The unfortunate part of this story is that it isn’t imaginary. It actually happened to someone I know.
With the recent study of the Gilead drug Remdesivir showing success in the most recent study, shortening the hospital stay by an average of 4 days you would think things would be on the up and up.
When discussing Remdesivir, Dr. Anthony Fauci said “What it has proven is that a drug can block this virus” (https://apnews.com/b894f3b39f6915dcc3cc402438deaf0b) Keep in mind this is not a cure or a vaccine event but it has established itself as helpful for those that are already in the hospital with Covid-19.
Other positive signs are the increase in testing, we are still not at the level we need to be at for my comfort but things appear to be trending in the correct direction. As we continue to get testing, continue to establish new guidelines and see additional positive markers (masks, capacity restrictions, social distancing and other drugs continue to test well) I think at that time we can begin to make market assessments based on the data.
The only thing I know how to do now without additional data is to become a historian. Before you bring out the champagne, let’s consider what the record of history can teach us about such unprecedented market rallies.
Since 1915, the Dow has had eight non-overlapping periods when it rose by 20% (or more) within the course of 12 trading sessions. The question then is, what comes next? In the one year (250 trading sessions) following a 20%+ rally, the market was up by 15% on average:
Despite how good this may sound, the sample size of this analysis is only seven, with all seven of these post-rally periods occurring over 80 years ago.
As good a teacher as history can be, in this case I find the above information to be irrelevant to today’s scenarios for many reasons. The next thing to look when we are trying to determine a market direction is volatility. Please keep in mind volatility doesn’t only mean a negative reversal of equities. One thing we have seen during market crisis, whether it’s the early 1930’s or the more recent global financial crisis, is that big up days 8%, 9%, or 10% up days (like in 2008 or 2009) can seem good now, but they only happen in markets brimming with uncertainty, markets that can turn south (again) on a dime.
It is this seesaw between fear and greed that makes me hesitant to be bullish right now, because while the Dow is 26% above its March 23, 2020 low, it is still 20% below its February 19, 2020 high. Please keep the following example in mind – If you have $100,000 invested and lose 20% you now have $80,000. If you gain back 20% then you only have $96,000. If you lose 20% you actually have to gain 25% to get back to even. This is why it has been my moto that in bull markets it is ok to be average, even average people make money. Where I earn my money is in a bear market or a severe market correction, because in times like that if I can save you from some of the downside we don’t have to gain as much on the way up to put ourselves in a good position as we move forward. Historically speaking we know markets come back:
While I can’t say with certainty the direction of the market, if history serves as a model, we can be under the ideal that we will be back at a breakeven point within 4 years and likely much faster based on the chart above. My personal take is that with a virus like this, once we get better testing, drugs that help reduce the death toll, and a vaccine, we would likely be able to get the economy rolling again and should see rebounds at or near the previous highs. Each client should take a long term view of their retirement picture. I don’t know one client that will need a large portion of their invested assets in the next 3-5 years. Keep faith in your initial financial plan and remember that this plan has been developed for the next 30 years + not the microscopic time frame of 2-3 years. We develop financial plans for a reason and that reason is during times of uncertainty. If you do not have a financial plan, contact our office and we can begin to put one together for you. A financial plan should be the foundation of your investment decisions.
It is important to remember that past performance does not guarantee future results. Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type. Please consult with your tax professional before any decisions are made.
Securities offered through Parkland Securities, LLC, member FINRA (FINRA.org) and SIPC (SIPC.org). Investment Advisory services offered through SPC, a Registered Investment Advisor. Lockwood Financial Strategies, LLC is independent of Parkland Securities, LLC and SPC
|Philip Lockwood | Founder + Managing Partner|
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