We wanted to reach out to clients amid the current market volatility and discuss the issues surrounding the Corona-virus.
As always, when we get into volatile periods, the most important thing is to maintain calm and then have perspective.
At this point, it is difficult to assess what the ultimate result of this outbreak will be, and the market always reacts negatively to new uncertainty. However, the market is likely ahead of the ramifications of the outbreak. The market is reacting to a potential supply shock. This means that manufacturing and delivery of goods, on a global basis, are being disrupted by the quarantines and travel restrictions imposed to restrict the spread of the virus. Supply shocks are differentiated from demand/credit shocks. These occur when lenders become fearful that demand is declining and reduce the credit, they are willing to extend. This reduction in available credit leads to further reduced demand creating negative feedback and a multi quarter recession. Conversely, economic declines driven by a supply shock are generally shallow as there is most often a catch up in demand once whatever is causing the supply shock ends. Customers restock supplies of whatever they were unable to get when it was unavailable. It could even be argued that the fear of a supply shock may act as a stimulus as business’ and consumers pull forward purchases of products, they think may not be available in the future. We have seen this with empty shelves of hand sanitizer, bleach, and face-masks.
While in the short term there likely will be economic disruption from the Coronavirus its long-term impact, over the life of your retirement or on the path to your long-term goals, is likely to be minimal. It is important to remember that over any 10, 20- or 30-year period there will be one and likely several periods where the stock market will fall 20, 30 or even 40%. However, a decline is not a permanent loss. We must remember that the stock market spends 90% of its time going up. Why? Because every day industrious managers and workers go to work to build and create new products and services that grow the value of their business’. The money generated each day is then reinvested and allowed to compound and build more value and wealth. If they can’t do that for a period because of Coronavirus it may affect the profit that business generates this quarter or this year, but it won’t affect that business’ results over 5 or 10 or 15 years, which is the period we care about.
When clients get concerned about short term market movements, I like this info graph. You can see that on a day to day basis the market’s movement is close to a coin flip but over any extended period the odds are VERY much in your favor. And don’t forget this time period includes The Great Depression, WWII, Cold War, Vietnam, 20% interest rates, Kennedy assassination, Nixon Impeachment, tech bubble and on and on.
We also remind clients that these types of periods are why we are diversified. It is why we own alternatives and bonds and make investments that generate returns irrespective of economic growth. This diversification sometimes seems ill conceived when equities are up every day. But shock periods remind us why we own these investments and why they are important to life goals, income goals and retirement goals.