As we’ve all heard more than once lately, the world is navigating through uncharted waters as drastic measures are underway all over the world to slow the spread of Covid-19. While we know many of these life-altering changes are temporary, no one can be certain of the timeline.
It’s important to say that this crisis is about much more than the impact to markets and the economy, but in our role as financial planners, it’s our job to think about that aspect and how to respond as a result.
Stock markets are forward looking. Sticking with the nautical analogy, they operate like a lookout perched on the crow’s nest atop the mast of the ship. The lookout often spots and reacts to rough waters while those on board below still believe all is well.
Such was the case in mid-February as markets began to slide long before terms like “shelter-in-place” and “self-quarantine” were commonplace. From there, the situation evolved rapidly and by March 11, just hours before the NBA canceled its regular season and Tom Hanks & Rita Wilson announced that they had tested positive, markets moved into bear market territory for the first time in 11 years.
As we head into April, no one on board the ship can see the other side of this storm. As a result, we continue to see markets swing up and down while investors attempt to gain some understanding of what’s to come. In fact, the swings were dramatic enough during the week of March 23 that the market technically re-entered a bull market cycle over a few days.
But as the lookout sees things heading south before most, it also typically regains confidence while everyone on board is still sick to their stomach, unable to see the calmer waters ahead.
March 2009 seemed like it was just the beginning of bad news and, for much of the economy, it was. But in the midst of the worst of the storm, the market bottomed on March 9th and started its climb upward from there. While it would be years before many felt better about the economy’s footing, the market recovery had long since begun.
When it seems like everyone is selling, we know that’s not true. For every person selling a stock at a given time out of fear, individual circumstance or unwillingness to deal with the corresponding risk, there’s someone with a different point of view or circumstance willing to take on that risk. There are buyers on the other side of every sale going on in markets right now.
Not selling can feel like inaction, but it’s not. It is recognizing that the plan and disciplined investment process put in place ahead of the storm was designed to be resilient. In plans we build with clients, those relying on their portfolio for income typically hold several years’ worth of projected needs in cash and short to intermediate-term, high quality bond funds. For those still accumulating, the opportunity presents to take advantage of lower prices while stocks are down.
We don’t know how this crisis will play out, but we do know it will come to an end. The hope is that the measures taken today, while costly, will save lives and allow our global health system to save as many people as possible. In gloomier outcomes, we could see health systems overwhelmed and more lives lost than expected. But in either case, tragic as it may be, we will come through this.
People will get back to work, children will return to school, sports teams will retake the field and we’ll start to rebuild what we have lost. But while the economy will recover, it will not look exactly like the economy we knew just a few months ago. There will be companies and whole industries that will come out much stronger than others, some companies will fade away while new companies will be built to meet previously unforeseen needs. Having a diversified portfolio will be more important than ever to ensure investors capture the available returns for the risk they have taken in weathering the storm.
The more I’ve thought about this, the more I’ve realized that in markets and in life, the waters are always uncharted. We never really know what tomorrow is going to bring. Having a well-designed plan in place is akin to having the proper safety gear onboard. It doesn’t make the rough waters any easier, but it provides some comfort in knowing you have the tools available to respond.