Five Years or Five Days?
Describing in one phrase what happened in the markets over the last five trading days, “shoot first, ask questions later” seems appropriate. On February 19th, the S&P 500 made a record high as the market had yet to price in the severity of the Covid-19 outbreak. But after more headlines and further spread of the virus to other countries, that has all changed. Yesterday, the Dow Jones Industrial Average had its largest one-day point drop in history. For the week the S&P 500 lost 11.5%. The S&P 500 from the peak has declined more than ten percent and has entered “correction” territory. A correction in market parlance is a move from the peak of over ten percent. What we have observed is the fastest correction in the S&P 500 on record. The chart below shows the length of time for other previous corrections.
The fastest correction in history is interesting, but it doesn’t mean anything in terms of what to expect next. The second fastest correction happened in February 2018, and afterward, the market rebounded and continued higher. The swiftness does tell me that investors are nervous about the potential global economic implications of the virus, and this can be measured directly by looking at the volatility index, which measures market fear. Today, the volatility index is at the highest levels since February 2018, which coincides with the aforementioned second-fastest correction in market history. The media and financial press have a part to play in the spreading of fear concerning Covid-19. At the same time, according to the CDC, the virus is no worse than ordinary influenza that we deal with every winter, and which has killed an estimated 242,000 people between 2011 and 2017.
So what is RK doing for our clients during this decline, and could it get worse from here?
The answer to the second question is yes it could. Many scenarios could unfold with the virus that could be negative. I could spend pages speculating, but no one knows. Times like this remind me of Warren Buffett’s quote, which says to be greedy when others are fearful and fearful when others are greedy. For patient long-term focused investors, this period in the market may provide an opportunity to buy stocks on sale and sell bonds that moved higher in response to investors fleeing stocks for the relative safety of bonds.
What RK is doing for our clients is what we always do, which is review portfolios and allocations to see whether it’s time to rebalance portfolios. To keep our portfolios within their range for long-term success, we allow each piece of the portfolio to move or drift above or below the target that is pre-defined in the Investment Policy Statement. Buying and selling will occur if and only if the components of the portfolio move out of tolerance. This systematic approach to rebalancing removes any emotion or bias from the equation. It maintains the focus where it should be, which is maximizing the long-term success of our clients’ financial plans. Investors that are choosing to panic are seeing something completely different than what long-term investors see. The graphic from acclaimed author and napkin artist Carl Richards sums up this week perfectly.
We would advise that investors take a deep breath, and shift your attention to the left side of the napkin, and maintain focus on the things in your financial life that you can control.