In this podcast/blog/video, I discuss investing during the corona virus crisis. You can see our video here.
I know it has not been easy to look at your account balances go down over the past couple of weeks. It feels a bit like we are looking at the 2008 great recession again, with a dropping stock market, recession fears, fed interest rate cuts and government stimulus.
While it’s not clear what the ultimate toll the infection takes on the nation will be, the economic upheaval caused by the outbreak will likely not be nearly as damaging or long-lasting as the downturn of 2007-2009.
The 2008 financial crisis was the result of years of weaknesses in the economy. The current situation is closer to a natural disaster.
Looking back on the 2008 crisis, the downturn was a good time to invest in the market. I expect that when we look back on the 2020 downturn we will look at it as a good investing opportunity as well. Downturns are not the time to sell stocks and get out of the market but a time to invest and put more into the market.
I’m going discuss why you should not panic and I’m going to compare this coronavirus downturn with the 2008 Great Recession.
Why you should not panic
- You are prepared for this. We have positioned your portfolios to have less in stock because of an overvalued stock market.
- For our clients, the money in the stock market is not money that will be sold and used in the next five years. There is time to ride out a significant downturn.
- Most downturns are followed by a boom market. In the year after the three previous 20%+ market losses, the index gained an average of +32%. You have to stay invested during the down times to get the benefits of the recovery.Much of the upturn happens before the economy seems like it has recovered. Stock markets are forward-looking, anticipating future conditions. The stock market may already have priced in the effect of a recovery before the recovery actually occurs.
- When you miss any of the high performing days in the market, the return on your portfolio is significantly reduced.The S&P 500 from 1994 to 2013 was up 9.2% annualized. If you missed the 5 best performing days during those 20 years, your annualized return is 7.0%. If you missed the 20 best performing days during those 20 years, your annualized return is 3.0%.
- The losses are not proportional to the gains. Generally, bear markets are about a third as long as a bull market and average to be about 35% smaller.
- Markets significantly drop every year. Each year, on average, the stock market will drop 14% during the year.
- Be caution acting based on the cable news. The markets will make significant moves each year and the cable news shows will fill hours of air time pretending to know why it happened and predicting what will happen next.
- Since World War II, the S&P 500, on average, has incurred declines of 5% or more every six months. 85% of all S&P 500 declines of 5% or more got back to breakeven in an average of four months or fewer. Hence, investors should be thinking about buying during this downturn rather that thinking of selling.
- For our clients, you have a full financial plan in place so keep these downturns in perspective. You should rebalance and take advantage of these downturns. This does not impact our overall plan.
Comparing 2020 Coronavirus Crisis with the 2009 Great Recession
The Great Recession. The downturn was set off by an overheated housing market. Banks approved mortgages (to many unqualified buyers), driving up home prices. Mortgages were bundled into securities and sold them to other financial institutions. The problems had been simmering in the housing market and banking system for years.
Current crisis. The coronavirus, which originated in China late last year, has sparked today’s economic hazard. As Americans avoid more public places, the virus is likely to hurt sales at restaurants, malls and other venues. There are some signs retailers are already taking a hit.
How long it lasts
Great Recession. With millions out of work and household and business spending decimated, the downturn lasted 18 months.
Current crisis. Assuming the number of cases peak in the next few months and abates by summer any downturn is likely to last six months or so.
Great Recession. Household debt climbed to a record 134% of gross domestic product with saving just 3.6% of their income at the end of 2007. As Americans worked down that debt, spending fell sharply.
Current crisis. Household debt is at a historically low 96% of GDP. Households are saving about 8% of their income. We can handle a brief slump and continue spending at a reduced level. Consumers are in much better shape.
Great Recession. Nearly 9 million Americans lost their jobs in the downturn. Unemployment more than doubled to 10%.
Current crisis. Job losses are likely to total in the thousands, with travel and tourism and manufacturing enduring much of them. The 3.5% unemployment rate, a 50-year low, could rise to 3.8% to 4.1%.
Great Recession. Corporations had $5.8 trillion in rated debt as of March 31, 2009. Less than two-thirds, or about 65%, was investment grade, which ratings agencies determined was highly likely to be repaid..
Current crisis. Corporations had $9.3 trillion in rated debt in 2019. A higher percentage of corporate debt today is considered to be investment grade at 72%.
Great Recession. Flaws in oversight and weak regulations at Wall Street’s largest investment banks were other contributing factors to the financial crisis. Some experts point to the repeal of the Glass-Steagall Act, which once kept commercial and investment banking separate.
Current crisis. The global financial crisis ushered in sweeping changes to how the U.S. government regulates the banking industry. The new era, which included the Dodd-Frank Act in 2010, required banks to have more cash in reserves to provide a cushion in case the financial system faced economic shocks.
In the U.S., banks with more than $100 billion in assets are required to take the Federal Reserve’s “stress tests,” a move that ensures financial firms have the capital necessary to continue operating during times of economic duress.
The magnitude of the challenges the economy faces aren’t as dire as the obstacles during the Great Recession, experts say.
Great Recession: The Federal Reserve’s key interest rate was at 5.25% in 2007 as worries about the housing meltdown grew. That gave the central bank plenty of room to slash the rate to near zero by late 2008. The Fed also launched unprecedented bond purchases to lower long-term rates, such as for mortgages.
Current crisis: The Fed’s benchmark rate is at a range of just 1% to 1.25%, giving officials little room to cut. And 10-year Treasury rates are already below 1%, raising questions about the effectiveness of a renewed bond-buying campaign.
Great Recession: The downturn inflicted pain throughout the economy, and so Congress passed a sweeping stimulus. The $787 billion American Recovery and Reinvestment Act doled out tax savings and credits to individuals and companies; provided funding for healthcare centers and schools; assisted low-income workers; and approved massive upgrades to transportation, energy and communications networks.
Current crisis: The damage this time is more contained and lawmakers are discussing more targeted measures, such as helping the beleaguered travel industry and offsetting income losses for hourly workers by expanding paid sick leave and unemployment insurance.
Great Recession: During the housing bubble that began in the 1990s, home prices more than doubled by 2006 before crashing. The housing market remained in the doldrums through 2012.
Current crisis: Although prices have risen steadily in recent years, they’re just 22% above their peak. Homes aren’t overpriced. That means with mortgage rates low, housing can help offset troubles in the rest of the economy.