– by Chip Sawyer, CFA, Chief Investment Officer
When Dad left for Hawaii on January 18, the S&P 500 Index stood at 3,329. While Dad was enjoying the Hawaiian sun over the next month, the index added another 2% setting a new all-time high on February 19. Dad returned on Sunday and the market has lost 12% in the four trading days since his return. So, we’ve booked him a one-way return ticket to Hawaii and told him he can’t come back until the market makes another all-time high. Problem solved.
In our annual meetings, we like to remind our clients of the market’s tendency to test investors’ resolve in the form of market drawdowns. This reminder is especially important after the market has as successful a year as we had in 2019. Years like last year and 2017 (when the market increased every month of the year) tend to lull investors into a false sense of calm. We forget that over the past 40 years, the average intra-year decline in the S&P was 13.8%. However, over that same time horizon, investors who did not panic and sell during one of these drawdowns made 11.8% annually and 8,574% cumulatively.
In our annual meetings, we like to remind our clients of the market’s tendency to test investors’ resolve in the form of market drawdowns.
The Importance of Keeping Emotions in Check During Corrections
Of course, it’s much easier to keep your cool when you’re talking about volatility in the abstract. It’s much more of a challenge to keep your emotions in check when we are in the middle of one of these corrections as we are now. As the great American philosopher, Mike Tyson, once said, “everyone has a plan ‘till they get punched in the mouth.”
At Westover, our plan is to intelligently manage portfolios to each of our client’s specific equity target. That means when stocks are doing well, we are selling to bring them back in line with the target. And conversely, when stocks are doing poorly, we are buying using proceeds from the bond and cash side of the portfolio.
The Economic Impact of the Coronavirus
There is always a reason for market corrections. And the coronavirus that has spooked the market this year is a legitimate concern. There will certainly be an economic impact from the global response to this health crisis. Japan has closed schools; China has closed cities. Airlines have restricted travel and waived cancellation and change fees. Because we are in the middle of the crisis, there are too many unknowns to analyze this on a fundamental basis. What we do know is the markets have already priced in many of the risks. And we also know that markets always bottom before the last of the bad news is reported.
While the current coronavirus has been more widespread than some previous health crises, it’s still helpful to see how the market performed after these prior scares.
S&P 500 Index Performance
|Avian Flu||Jun 2006||+11.7%||+18.4%|
|Swine Flu||Apr 2009||+18.7%||+36.0%|
(Source: Dow Jones)
Over the next few months, we will learn about new cases of this virus. We will see a public response to these new facts, and companies will update the markets with how their business is being challenged. Apple and Microsoft have both recently made announcements estimating its effects. But remember that the market has already priced in a 12% correction to account for this virus. There could very well be additional volatility as the market digests relevant news. But a year from now, we’re confident that the globe will have contained the virus, and the market will have resumed its pre-virus trend.
Corrections Provide Opportunities
These corrections are no fun. But remember that they do provide opportunities to buy stocks at lower prices which will pay off in the long term. We like to call these bouts of volatility the price an equity investor must pay to realize the long-term gains that help us reach our financial goals.
And keeping that long-term perspective is never more important than after you’ve been punched in the mouth. Just ask Mike Tyson.