COVID-19 and Our Markets

Wooster Corthell |

To our clients and associates,

While the market is certainly on all of our minds, we must not lose sight of the individuals who are impacted by the actual disease itself. We now have a client who is on a ventilator and has been in ICU for over a week. More on this later.

The world’s stock markets are down about a third from their all-time highs just a month ago. This is certainly the fastest drop of this magnitude and people are understandably frightened. Yet it is important to realize that the US markets drop this much on average about once every five years. Of course, after an eleven-year run with only a handful of 20% adjustments, this one seems especially hard.

Then add the fear factor of a worldwide event of epic proportions and it is understandable for people to focus on the immediate situation and potentially lose sight of their long term goals. Let’s spend some time reviewing this situation in more detail.

  • Coming into this pandemic, the US had its strongest economy in history.
  • As little as three weeks ago on February 29, it was announced that the US economy added 279,000 new jobs in one month.
  • Our banking and overall financial system, thanks to reforms after the Great Recession, had their best balance sheets in history.
  • Record low borrowing rates and the infusion of cash into the bond market and society in general, will mitigate the economic impact to some degree.
  • Unlike other recessions where the causes are often complex, hard-to-determine and difficult to resolve, if we go into a recession this time, we know the specific reasons, can take appropriate steps to mitigate the damage and we pretty much know it will end after the virus has burned itself out.

Here’s the best part: not one client has lost any actual money as long as their positions have been maintained and not sold.

From the bottom of the Great Recession at around 6,400 on the Dow, to the peak of the market last month at around 29,550 the market had risen by a factor of over 4.5 over the past 11 years. I certainly can’t predict that this will repeat itself in either direction, but I believe that for our clients, most of whom have at least a 20-year horizon, they will see far better returns by riding through this difficult time than by panic-selling near a market bottom.

Studies by Dalbar Associates definitively show that across rolling 20-year periods, the market returns about 10% annually while the average investor receives returns of 3 to 4.5% annually (and our clients are far better than average!). Why the difference? Because the average investor tries to time the market by reducing or eliminating equities when things get volatile. Then they wait too long to get back in because they want to be “sure” the market is finally moving upward. In other words, they need to be right twice – a nearly impossible task - to achieve the historical returns of the market.

Will there be a recession? I don’t see how we can avoid one but I will say this: The stock market is considered a Leading Economic Indicator. It often trends upward about 6 to 9 months ahead of the actual economy. Investors who get out or reduce their equity allocation will likely miss this upturn. There will be pent-up demand for services and goods along with so much money on the sidelines that a recovery from this particular recession will likely be swift.

My many years of investing experience inform me that the single best thing to do is to hold your positions, ride this out, add to your 401(k) or IRA if you can and focus on staying safe and uninfected.

Now to our client. He is 59 years old and a very successful VP of Sales in the New England region. Before the word coronavirus was really known in the US, he developed a fever, fatigue and pain in his joints – but no respiratory symptoms. When things worsened a week ago Saturday, he went to the emergency room and was immediately isolated. The next day he developed difficulty breathing and was put on a ventilator with 100% oxygen. Several days later the test results confirmed coronavirus. He has been sedated all week and is now receiving a 50% oxygen push. An anti-viral used for AIDS patients had no affect and his doctor is awaiting the arrival of an anti-viral used for EBOLA patients. Fortunately he was in good health when this happened and his prognosis is positive. His wife is quarantined to her home and must report her temperature twice daily to the Public Health officials for 14 days. She only gets one update a day from his overworked doctor.

How do I know this situation so well? This client is my brother-in-law. I was last with him many weeks before he would have been in the incubation phase. (Fortunately, I’ve had no symptoms whatsoever and all other family members are fine.) When you put a face and a life to the statistics, all of this news takes on a whole new meaning.

We appreciate the prayers and kind thoughts of those we have shared this with and we hope that you and your family avoid the ravages of this disease.

Wishing you all the best,

Al Wooster

Past performance is not indicative of future performance. Loss of principal and/or loss of portfolio value are possible.