Hello again.
Well, it’s been a historical week in the stock market. The market topped last Wednesday and, over the last 6 sessions, we’ve had the fastest 10% correction in the history of our country. I would rather be recognizing some other historical feat but we’ll take it.
Pullbacks are NEVER fun. In fact, they’re quite awful and typically cause many to question whether to ‘stay the course’. That is natural. The good news is pullbacks, corrections (-10%), and/or bear markets (-20%) are, in fact, temporary.
I had a newer client text me yesterday and say “I’ve never see it this bad?”. At that point, we were down 12% from last week’s all-time highs. I reminded him we were down 20% in December of 2018…’just 14 months ago. And down over 50% at the bottom in 2009. Recency bias is very real.
Could a more severe selloff happen again? Sure. Do we expect that? No. But anything can happen. That shouldn’t be news to anyone. As investors, volatility is the price we pay for growth. Often that ‘price’ can be a bit painful because of the associated emotions. The key is not let those emotions dictate your investment plan. Around here we often say ‘Scared is not an investment strategy’. We all know that but, sometimes, we need reminded.
Relative to the coronavirus, the news is scary. Most news is. The virus is doing what viruses do: spreading. We all know that. There are still many unknowns and the market hates unknowns. But how much bad is baked in? Considering we’re in the middle of literally the fastest correction in the history of history, I’d say a LOT of bad is baked in.
Is more pain ahead or behind us, relative to the markets? I believe most of it has already happened. We are very stretched from both a technical and sentiment perspective. The headlines are awful and may get worse. But buyers should return soon. Could this be a major overreaction? YES. Here is a link to a New York Times article relative to the virus. Am I including this link because I’d like to believe it? YES. But that doesn’t make the article untrue.
Could the disruption in the global supply chain and/or the fear of the virus spreading lead to a recession? Sure. Is that the end of the world, ‘market-speaking’? No. Recessions are temporary, natural, and part of the market cycles. They aren’t a reason to ‘go to cash and wait for things to get better’. They’re opportunities, frankly.
Last Wednesday, consumer confidence was high, the labor market was strong, housing was strong, rates were low (now lower), banks were lending (still are), unemployment was near record lows (still is). Last Wednesday…8 days ago. I think we’re ok.
And please don’t misconstrue this (or any communication) as us not caring about everything that is going on. We care – A LOT. Our job is to embrace volatility, to plan for it (via owning bonds/cash) and, ultimately, to take advantage of it. And that is, factually, our plan.
I’ve used the word ‘temporary’ twice so far. Maybe what follows is a really bad analogy. But in a couple of months I will celebrate being married for 22 years. Like most married couples, we’ve had some rough times. Real rough – house fire, tragic family deaths. Believe it or not we even quarrel at times. Some of those last a day, or three. Have some lasted longer? Probably but I don’t really remember those. We’ve stayed married and we haven’t let those temporary setbacks – however painful – derail what we’ve built over the years.
Long-term investing is really no different. Pullbacks, hard times, setbacks are going to happen – always. They’re always lurking around the corner. They’re all a little different but, so far, in the history of history they’ve all been temporary. This one will be too.
Side note: I have 3 kids and typically invest $X every month to dollar cost average into their college accounts. This morning I pulled the trigger and moved the rest of the year’s $$ into their 529. I believe that is very prudent.
On Tuesday we raised equity exposure. We plan to continue to do that as/if this pullback gets worse. We believe that is also prudent.
Again, we pray for those affected by the virus and hope for a solution as soon as possible.
Please NEVER hesitate to reach out with questions or concerns. We’re here to help. Thank you.
Sincerely,
Layton & your LJI Team