Here are the topics we discussed:
How are people feeling about the markets today?
Apollo assured us that these 2-4% daily swings are uncommon and that the negative emotions they generate are normal. He explained that with so much uncertainty and unknowns surrounding this crisis that many investors are operating on emotions rather than rationality. This is where having an advisor in your corner is crucial. Your advisor can help you detangle emotion from investing and make decisions using logic.
Can history teach us anything about this current situation?
Similar to comments in Brent’s newsletter, Apollo agreed that each triggering event seems like it’s never happened before. He believes that our current events are merely different economically, although still not unprecedented. In an economic contraction one of the main drivers of the economy, either businesses, consumers, or the government, suffers some sort of difficulty and reduces spending. In this case, much of the economy has slowed down or shuttered completely. This creates a decrease in demand but also a supply shortage. Two examples from history of this situation were discussed.
Spanish Influenza of 1918: With millions of Americans suffering from the flu, the economy had to shut down to deal with the pandemic. Despite the limitations of economic data from that time period, we know this had a profound impact on the economy. We also know that the time period that followed, the roaring twenties, were one of the most economically robust periods in history. Apollo also pointed out a lesson learned during this time is crucial when we consider reopening our economy. During the flu pandemic, individual cities had their own timetables for reopening that were independent of wider state or federal oversight. Time showed that cities who reopened “too soon” still suffered economic consequences due to reduced consumer confidence and demand related to fear of the virus.
World War II: With 11% of the workforce gone to war and reduced consumer spending, creative thinking had to step in to solve our economic troubles. Women began working outside the home and major U.S. companies retooled their factories to contribute to the war effort. This also had an interesting effect on the stock market. In the 5 years prior to the beginning of the war, 4 years had negative returns averaging -7.5%. However, during the war the market returned upwards of 22%/year. Therefore, despite the negative outlook an investor would have had at the beginning of the war, you would have doubled your investment by the end. The American economy and companies are resilient. They will always find a way to produce profits, whether that be in Ford Mustangs or ventilators.
Is the market functioning as it should?
Yes, and the movement we’ve seen lately is proof. The larger drops in the market at the beginning of this crisis was caused by the collective realization that many companies would not be able to meet the revenue expectations they had set for the beginning of the year. Therefore, if a company is going to make less money, a share of its stock should trade at a lower value. When this occurs at a large scale to many global businesses the market can appear to be in free fall.
These big daily or weekly fluctuations we’ve seen lately are the result of the multitude of “unknowns” surrounding the current economic situation. With technology in investing, a lot of buying and selling is driven by computer modelling. Without enough known or predictable variables, these models will produce a wide range of market expectations that trigger action by investors. It is important to remember that the basic function of the market is to link buyers and sellers. So, for every person selling a position and thinking “there must be another crash on the horizon” there is another person thinking the exact opposite.
So, what should rational investors do during this time?
Apollo cautioned first against two common urges. Those wanting to sell their stock positions create two additional problems in doing so. First you must be able to accurately judge when is the best time to get out to avoid significant losses and then also be able to get back into the market right before the recovery. This is nearly impossible. Additionally, selling your stocks doesn’t make you feel less stressed by the ups and downs of the market. It’s just replaced by the stress of trying to predict when to buy back in and the worry of missing out on gains.
Those who wait for things to settle down will have already missed out. Apollo brought up the returns of 2009. During the depth of economic recession, the market returned 25% while the bulk of the economy was still struggling. This is a good reminder that the stock market is not “the economy” and does not move in lockstep. Often, stock market recoveries even precede economic recoveries.
It can be hard to know how and when to take action, which is why it can be very beneficial to work with an advisor and come up with a financial plan. With the help of their advisor, investors can build a solid investment plan that factors in good times and bad by ensuring their stock-to-bond mix is appropriate for their situation and they are well-diversified between U.S. international, small, and large companies.
Thanks to all those who attended. For those of you who were not able, we plan to hold more of these events in the future and are open to suggestion of further topics.