By: Ralph C. Freibert III, Chief Investment Officer
As a part of my research related to this unprecedented worldwide event, I have been reviewing information from our research firm and investment product vendors. This effort is designed to gain a view of the consensus themes and an idea of where the markets might go from here.
Stocks have fallen to levels not seen since summer 2017. The question I keep getting is, “Is this a good time to buy?” I am encouraged by this question because it means that we have done our job to educate our clients about market cycles.
Since the market high on February 19th, we are now down 32-percent, which beats the 2018 market decline and places us in the first “bear market” since the “2008 Financial Crisis”. Back then the market decline began on October 9th, 2007 (the peak of the Dow at 14,164.53) and reached the low on March 5th, 2009 at 6,594.44. This represented a 53% decline over a 17-month period. If history provides any insight into this current situation, we likely will have further to fall in equity markets before they begin to rebound.
How far is pure speculation, but we can do a little math to make some estimates and that work has taken place in many offices. The keys to these estimates are company earnings and we have no idea how much companies will be making over the next few months or even the next year. I have seen reasonable estimates that show a 10-percent decline in earnings to as much as 20-percent in the extreme. If we see the worst of these estimates, this will feel a lot like 2008 and we could see significant declines in stocks from the current level. However, unlike 2008 the recovery could be swift since this is a self-imposed event, but only time will tell.
What I do know is that we will adapt and continue to operate, working from home in many cases and increasing our use of technology. If you are not comfortable with video technology, it may get a bit lonely for the next few weeks, months or even year.
The world governments have responded swiftly and decisively, including a proposal of direct payments of $3,000 per family to all Americans who make under $75,000 individually or $150,000 jointly and declines by $5.00 for each $100 over the limits (this is just a proposal at this time). Additionally, the Fed has stepped in to purchase bonds and provide liquidity up to $1 Trillion and that number continues to move. And finally, the Fed has begun a direct lending program to small and mid-sized business. All these measures should soften the impact of this event and could provide protection, with the benefit of “Financial Crisis” hindsight.
However, despite all of this, there will be casualties. The CDC estimates a heavy death toll not necessarily in percentage but the number of those contracting the virus around the world is just too much for our already strained healthcare system. For those affected and their families we continue to pray.
Additionally, companies that borrowed to buy back stock likely will find themselves feeling the squeeze as they struggle to meet the interest payments with little revenue or even no revenue for a period. Even with the emergency lending, this may only exacerbate the inflated debt burden. Companies that planned for a rainy day will get the opportunity to buy companies, plants and equipment at bargain prices. Don’t forget, JP Morgan/Chase purchased the entire Bear Sterns company for the price of their Park Avenue Building across the street. This is how markets work and this will be no different, despite the many saying, “This time is different”. Sure, it is different in cause and even scope, but not when compared to many other events that have taken place in history.
One saving factor here is that this is a self-imposed approach to slow the spread of this infectious disease. Once the virus is under control, things should return to normal quickly and companies will be back to producing products and offering services leading to a return of profitability.
We have been riding high on an inflated stock market for some time, low unemployment and corporate debt. That period is now over. However, as in all cases a new period begins and if we look out to 2022 (18-months away), we can see normalcy returning to our lives and the world. Once this is over, we will be changed and hopefully for the better, personally and financially.
If these words seem different than those presented just a few weeks ago, they are. As more information is developed, we know that this situation requires extreme attention and determined action. But that is exactly what is taking place as we speak. This virus has been identified, protections have been put in place and finally, we know that we will have a method of control and adaptation over the next year or so. Andrew and I are working as we always have and feel comfortable that the necessary precautions are in place for you and your investment portfolios.
I’d encourage all to take a hard look at your regular expenses, and perhaps delay any major purchases until we have more information. It isn’t likely that you will have much ability to purchase anything major right now anyway. All portfolios have liquidity and if needed can be accessed for emergency needs and income will continue to flow for those taking regular distributions. As always, you and your families are in our prayer.
This commentary reflects the personal opinions, viewpoints and analyses of Planning Associates Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Planning Associates Wealth Management, LLC or performance returns of any Planning Associates Wealth Management, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Planning Associates Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.