The coronavirus is now our experience, not simply a news story impacting foreign countries. The swiftness with which the exponential spread of the virus has impacted the economy and our citizens’ businesses and employment is startling. The stock market (i.e. investors) is assessing and reacting daily to the potential economic impact our country faces. And the volatility and declines are unnerving. Last week the S&P 500 index was down -15% and is now down -28% in 2020 and -16% over the past year. Not surprisingly as Americans restrict their activities to combat the spread of the virus, businesses in the retail, leisure and hospitality, and transportation sectors have been hit the hardest in the market.
In these uncertain times, we want to reinforce to our clients that their portfolios are constructed to withstand the market volatility and to grow over the long-term. The cash and bond allocations provide ballast to reduce portfolio declines in a down market and to protect the portion of your investment assets that you could need to withdraw for income or other purposes over the next several years. However, we acknowledge that during times of new panic, prices of bonds not backed by the U.S. Treasury can decline, as witnessed in 2008-2009 and again in recent weeks. That said, most bonds recovered strongly after the financial crisis receded in 2009.
We anticipate that the equity (stock) portion of our allocations will rebound once there is greater certainty regarding the spread of the virus and there is increased confidence that we will defeat it. Looking at the history of the virus in China and South Korea, the spread of the virus in the U.S. could begin to diminish within the next four to eight weeks.
Unless there is a short-term need to raise cash in your portfolio, we strongly advise against selling equities into the down market. The long-term trend of the stock market is up, as shown in the following graph. As you can see, the S&P 500 Index has weathered economic and political crises in the past. The vertical gray-shaded lines depict the length of the market downturns. Even severe bear markets have recovered within three to five years historically.
When equities are sold in down markets it is very difficult to determine where the bottom is to know when to get back into the market. Often the best “up” days immediately follow the worst “down” days. The following chart illustrates how equity returns can be compromised when not participating in the market on the “best” days. Maintaining a long-term perspective to stay the course during these difficult periods of market turbulence can be the best strategy. As the saying goes, “it’s not about timing the market, it’s about time in the market!”
Data provided by Fidelity
Collectively as a society, we are now taking social distancing seriously and practicing healthy hygiene and these habits will slow the spread of the virus. We are confident that as the threat of the virus subsides, the markets will recover.
As always, your team at GSB Wealth Management is here to serve you. Please call or email if you would like to discuss your investment account.