This was sent to me from one of my financial advisors...he is based in Seattle at RBC, and was on Forbes Top 100 Money Managers last year...thought I’d share it with you...I’ve removed links to websites per forum rules
Perspective
We are living in unprecedented times.
The US stock market traded at an all-time high just one month ago, February 19, 2020. Now, after experiencing the fastest 30% sell-off from an all-time ever high and the worst week in the stock market since 1987, I wanted to provide some perspective and my unvarnished thoughts, with the disclaimer that there is no clear answer to this dynamic situation, and that the key information necessary to have a perfect reaction is still unknowable.
· What happened?
· What do we do now?
What happened?
I first became aware of the Coronavirus while travelling in Australia in late January / early February. A friend that runs a company in China brought it to my attention again in mid-February. At the time, it didn’t seem like a serious world market concern, as: 1) the Chinese stock market was trading near all-time highs after they ended maximum quarantines; 2) the world has experienced many similar viruses which quickly faded away; 3) the Chinese were able to quickly resolve the outbreak (reporting the last domestic case last week) with only about 3,200 deaths; and 4) South Korea, which has done the most testing, had only a 1% death rate and it seemed that only the sick were being tested in other countries which overstated the death rate.
Clearly, it was possible to stop this virus if we had acted quickly.
The Good, Bad and Unknowable
The good news is that we entered this crisis with a strong economy, strong employment, the lowest household debt service ratio in decades (the debt service ratio is the percent of household income required to service all outstanding debt), corporate balance sheets are strong and banks are well capitalized by historical standards. Source: RBC Capital Markets. The Federal Reserve has stated they will “do whatever it takes to support the economy,” and Congress is in discussions for a massive, multi-trillion dollar economic rescue package to support the hardest hit parts of our economy. It is also good news that most of Asia has survived the worst of the Coronavirus and, in doing so, provided a road map for curtailing the spread. They did such a good job, many areas are now coming out of quarantine and reopening businesses just two months after their containment programs began in earnest.
The bad news is that our government was already running a trillion dollar deficit funded by the Federal Reserve monetizing debt; fully shutting down America will be far harder to achieve; our service-based economy will suffer deeper; our savings rate is far lower than the Chinese; and our Federal Government has not shown very strong leadership to this point.
The unknowable questions from an investment perspective are how long will this take, and how far will the market drop before finding strong footing?
The answers to these questions rest on unknown and arguably unknowable factors such as: 1) how long will the Coronavirus pandemic actually last; and 2) what will the final mortality be? In regard to the length of the pandemic, from a market perspective it does not have to be completely resolved for markets to begin stabilizing and eventually rebounding, just that an ending can be reasonably forecast. Experts say the Coronavirus will initially rise exponentially, then slow, peak and fall very fast. I think the market just needs to see the rate of increase slowing, or actions taken that will make that inevitable, to allow rationale investors to step in and buy. In regard to the mortality rate, the data is all over the place, as low as 1% in South Korea to as high as 8.3% in Italy, with a current world wide average of 4.06% (Source:, WHO, National Health Commission of the People’s Republic of China; Korea’s CDC; John Hopkins University, Washington Post). Similar to the issue of timing, markets don’t need to know the exact mortality rate, just a narrowing of the range of outcomes to help allow for rational action.
RBC Global Coronavirus Insights- For continually updated information on coronavirus market impact and opportunities, we are regularly updating our website:
Historical Volatility
This is not a normal environment, so our traditional “volatility happens” commentary is not completely applicable, however it is valuable to understand that the roughly 30% decline in markets already ranks 2020 as one of the worst years ever: S&P Index Calendar Year Total Returns-
What do we do now?
The market can certainly fall farther, and likely will until there is some clarity to the health and economic impact of this pandemic. With the initial economy in good shape, and both the Federal Reserve and Congress spending trillions of dollars to support the economy, a quick monetary and fiscal policy resolution could create a very fast recovery. Or, the economic crisis could cause another financial crisis prolonging the recovery due to severe damage from debt defaults and corporate bankruptcies.
Ultimately, the appropriate decision on what to do next depends on each individual investor’s liquidity needs (how much annual cash do you need from the portfolio and for how long), stomach for volatility, and investment time horizon.
To help think through this, I would offer the following thought process:
If you would sell at lower prices, you should consider selling now at current higher prices.
If you do sell, however, what is the plan to repurchase? Many investors answer this question with “when things settle down”, but if you are selling because the market is falling, then you likely will not want to buy into a future falling market where prices are lower and still falling. We know the pandemic induced sell-off will end someday, and markets may rise very quickly from whatever the low point happens to be (as we have seen in the past few weeks, the market has jumped up 10% in a day several times) and by the time things “settle down” the market may be at higher prevailing prices than when you sold.
Again, it is important to reassess your liquidity needs and temperament to understand the next steps to take. If anything has changed let us know. If you wish to discuss your specific situation, let’s talk.
The Long Run:
While the exact path is not known, America will survive and prosper. We are fighters and entrepreneurs who will pick ourselves up after the dust settles and get to work.
The goods and services we all used coming in to this moment, we will eventually wish to consume again, and companies and businesses (which we can own a part of) will exist to provide those goods and services.
Owning the great companies of the world has been the surest path to wealth creation for over 100 years and I do not believe the current crisis will stop this from being true going forward. As an example, the oldest stock purchase of any of my clients, is the purchase of $122.41 of Proctor & Gamble- PG on 1/19/1937. On a split adjusted basis, the purchase price was 17.8 cents. Last week, even after PG was down 18% for the year, this position was worth $78,252, or 639 times the original purchase price, plus over 80 years of dividends. Reflect on all the tragedies and triumphs the United States has experienced since that purchase in 1937: world war, presidential assassination, the oil embargo and high inflation of the 1970’s, Gulf wars, the crash of 1987 when stock market fell 23% in one day, the Technology crash of 2000-01 (S&P 500 fell 50%), the 2008-2009 Great Recession (S&P 500 fell 55%). Long-term stocks can create excellent returns, but they require fortitude of belief every now and again.
Our Team
Our team is safe, healthy and fully engaged serving clients.
For ensured continuity of business, Michael, Jake and myself are self-quarantining at will with full remote access to all normal RBC workstation access. Currently, Caryn is also working from home and Pat is in the office with other skeleton staffing to process any client requests.
For the safety of all, RBC policy has curtailed all in-office meetings, however we are ready and available to meeting via phone conference to review your specific situation and portfolio strategy.
We will get through this together.
Interesting links:
China air pollution- China factories are coming back online. You don’t need to believe the Chinese. You see the real time pollution data at link below. (The only time I can ever recall being comforted by pollution.)
