Oil Wars, COVID-19 and Markets…Continued

As the coronavirus “COVID-19” makes its way around the globe, people are scrambling to wrap their arms around the latest epidemic and what it means.

Thus far, it has reached 109 countries and appears to be headed for more. The overwhelming majority of cases to date have taken place in China, the country of origin, and it remains to be seen how effective containment efforts will be elsewhere.

As arguments begin to break out as to whether this is “merely an epidemic” or a “full-blown pandemic,” it seems pretty moot. The virus is spreading, and it is a valid and real health concern for many.

Making matters worse, this is also the first global crisis we have faced in the “social media” era. The echo-chamber the last several weeks has been incredibly loud, and incredibly hard to avoid. And the “regular” media is not helping.

While most experts (scientists, doctors, epidemiologists) are calling for calm and restraint, people are running around in an all-out panic to empty the shelves of Target, Costco, Amazon, etc.

Last night, global economic tensions and uncertainty rose even further as Russia and Saudi Arabia engaged in the latest version of a trade war, engaging in a price war over the cost of a barrel of oil. It was widely expected they would come to an agreement on limiting production and supply as the coronavirus situation played out.

As a result, this morning the S&P 500 immediately sank at the opening bell, triggering a “circuit-breaker” and temporarily halting trading. It went on to close today down the most (percentage-wise) since 2008.

This comes on the heels of last week, where markets were incredibly volatile, resulting in swings of 3% – 5% almost every day. Yet if you went to sleep last Sunday night and woke up Saturday morning, the market had slightly risen…a seemingly uneventful week.

So what do we do in a crisis? How should you react?

First and foremost, remember this:

The entire point of having a disciplined, evidence-based investment philosophy and financial plan is for times like this. If you change course in the middle of a panic, it is clear you have neither.

If you need money in the near-term, we have set aside more than enough in cash and high-quality bonds to cover your income and withdrawal needs through this storm.

I saw a great comment / reply thread on Twitter recently, where someone commented that “finally the bonds in my portfolio are serving a purpose.” And the subsequent reply read “no, the bonds have always been serving a purpose. You just didn’t realize it until now.”

The last decade of US market performance has made investors complacent. The expectation is that markets always go up and we just have to “buy the dip.” For the majority of you, we have a lower allocation to stocks and a higher allocation to bonds than when you came to us. That has less to do with the last several weeks and more do to with your financial planning needs.

Asset allocations and risk tolerance are constant conversations, and far more important to focus on in calmer markets. These conversations are “boring” and feel like they are holding you back when markets are rising, but it is critically important to have them in advance of turbulent markets.

A fellow advisor and friend of mine often jokes that the definition of “calm markets” is volatility….to the upside. Everyone wants more risk when things are good, but less risk when things are bad.

We never want to take more risk than is necessary to meet your objectives.

Risk is what you don’t see coming. Over the last several years, we have had countless conversations about where to park short-term money. Interest on savings accounts, CD’s and short-term bonds was paltry, while the financial markets were screaming to new heights every week.

Even when rates are terrible, our answer is the same. Money you need in the next 3 years has no business being in the market. Never take market risk you don’t need.

Why? COVID-19. Oil price wars. Treasury rates plummeting. These thoughts were not on anyone’s radar two months ago. But things change fast, and if you are overextended, it can be in very painful ways.

Market drops provide an opportunity for companies and markets (and people) to “reset”.

Remember that markets and companies are living and breathing things. They are subject to the same emotions individual people are.

Booms make companies complacent, bloated, and leveraged. They take on debt they don’t need. They acquire things they shouldn’t. They take aggressive actions to squeeze out a few extra bucks. They spend frivolously and beyond their “true” means. Does this sound familiar to some individuals and households?

On the flip side, they are also just as resilient. Busts make them evaluate everything. Right now, rest assured, companies are evaluating their size, their debt load, their growth plans, their staffing. Most of them will realize they have a lot of room for improvement. Some are in real trouble.

One of the great Warren Buffett quotes of all time is “only when the tide goes out do you discover who’s been swimming naked.”

There may be some additional pain, but those who planned and prepared will persist (both companies and people). Those who didn’t will struggle, and some won’t make it.

We employ the philosophy we have because it has weathered incredibly tough markets in the past, and it tells us how we should act and respond when a crisis hits.

When markets rise, we should sell stocks and buy bonds. When markets fall, we should sell bonds and buy stocks. This is exactly what a discipled rebalancing process dictates.

A difficult concept to understand is that when volatility spikes and markets decline, risk is actually lower after the fact than before. Market crashes lay the foundation for future growth.

Famed investor Shelby Davis once said, “you make most of your money in a bear market. You just don’t realize it at the time.”

It is hard to acknowledge this today, but we are now better positioned for future growth than we were yesterday, or two months ago for that matter.
The best investors to ever walk the planet are shopping for bargains and buying stocks right now.

When we trust the process and trust the system, we can overcome the emotionally-driven fear that we face as we see our portfolio values drop in rapid fashion. It forces us to do the right thing, even if it feels wrong.

We account for events like this when we adopted our philosophy, designed your portfolio, and based it on your long-term financial plans. These events never feel good, but we have weathered them before and we will weather them again.

We’ll make it through this…together.