The Coronavirus and Your Investments, Part 2
The longest ever US Bull Market celebrated its eleventh anniversary on March 8; the Bear Market began twelve days later. While it is sometimes difficult to determine the cause of stock market declines, the Coronavirus is clearly the culprit this time. It is not surprising that stock markets declined worldwide, since economic activity is being curtailed in most countries.
Bond prices continued to increase this year, a common occurrence when nervous investors sell stocks. Interest rates decline when bond prices increase (and vice versa), which is why interest rates are even lower than at the beginning of the year.
Energy related stocks were also harmed by a fight between Saudi Arabia and Russia, the number 2 and 3 oil producers (US is number 1), over whether to reduce production. Saudi Arabia wants all producers to pump less, to keep prices higher. Russia refused, so Saudi Arabia decided to increase production, making an existing price decline worse. Oil prices have now declined approximately 35-40% this year, a huge blow to energy companies.
Here is a hypothetical example of the year-to-date values of $100,000 investments into two different index funds. The stock fund follows the S&P 500 Index and the bond fund follows the Bloomberg Barclays U.S. Aggregate Bond Index.
Stock market volatility has increased. For instance, stocks were up 9% on Friday but declined 10% for the week (including Friday). A Wall Street Journal article stated that “the S&P 500 Index moved up or down by at least 4% for five consecutive sessions, the longest such streak since 1929…”
According to Market Watch, the average Bear Market decline for the S&P 500 Index is 35% and lasts an average of 146 trading days (days when the stock markets are open), or about 7 months.
However, those averages hide large variation in outcomes. Bear Market declines for the S&P 500 ranged from
- 86% during the 1929 Crash, which lasted 34 months
- 28% during 1962, which lasted 6 months
- 49% from March 2000 to October 2002, 30 months
- 56% from October 2007 to March 2009, 17 months.
This Bear Market is even more difficult to predict because it was caused by a Pandemic, which has never happened. Some people have said the Pandemic will peak in several months in the United States (but at different times in other countries) and that there may be a vaccine in as little as 12 months. But even if both those occur on schedule, what would that mean for the economy? When will governments blow the whistle and say it is time to go back to work, restaurants, sporting events and shaking hands? And how long before the economy returns to normal?
So, we don’t know when the Pandemic will end or when economies will recover. But perhaps we can agree on the following:
- This is a health issue. Concentrate on staying healthy.
- Be financially prepared by having sufficient emergency funds.
- If you are thinking about retiring, ask a professional to determine whether you can afford retirement now or should postpone retirement until the economy and stock markets recover.
- Historically, buying a diversified and well-managed portfolio of stocks when they were down and holding those stocks for long periods of time was a profitable strategy. Of course, past performance is no guarantee of future performance.
- Bond prices are at historic highs; having benefited from a Bull Market that has lasted 39 years. While prices may go higher, there is considerable risk of a bond Bear Market.
- High bond prices and low stock prices have left managed portfolios (with percentage goals for stock fund and bond fund allocations) short on stocks. Selling bond funds to buy stock funds can bring portfolios back to their stock/bond allocation goal. That means selling bonds at historic highs and buying stocks when they are low.
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.
Keep in mind that:
Past performance is no guarantee of future performance;
Investments involve the risk of loss of principal and earnings;
ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
“Average annual return” evens out variations in the actual year-to-year returns.
ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and you should not assume that these generalizations or information apply to you.
Investments mentioned may not be suitable for all investors.