by Brad Everett, CFA, Chief Investment Officer of Key Financial, Inc.
My name is Brad Everett, and I am the Chief Investment Officer here at Key Financial. Patti is on her way home from a speaking engagement in Australia and in the spirit of seamless (and continuous) attention to your portfolios, I wanted to give you a sense of some of what we’re thinking at this time. As you probably already know, financial markets around the globe have been experiencing increased volatility over the past several weeks, and especially in the past few days, with the S&P down just north of 7% between Friday and Tuesday. As of this exact time the S&P is up about 1.5% out of the gates here, but we’ll see what the day brings.
Much of this has been attributed to the continued spread of the Coronavirus. There has been an increase in confirmed cases outside of China – including Italy, Iran, Japan, and South Korea.
A natural question to ask is how this might affect your investment portfolio? I wish I could say otherwise, but we have no idea. Will the slowdown in China continue? Will the increase in other nations continue? Will the spread of the virus slowdown in the summer, giving researchers some time and a chance to create and produce a vaccine? We won’t know until it’s over whether history will repeat, but we do know how the market has responded to previous health scares. From BobVeres.com:
“When the public became aware of the SARS epidemic (a previous strain of the coronavirus) back in 2003, the S&P 500 index fell 14% over the subsequent two months, from mid-January to mid-March. But, according to a historical look-back by the MarketWatch economists, the market was up 20.76% a year later. The Avian flu outbreak in 2006, the Swine flu outbreak in 2009, the Ebola outbreak in 2014 and the Zika epidemic in 2016 saw initial downturns between 5.5% and 7%, but a year later, the markets had recovered by between 10 and 36%. We can note that the S&P 500 index fell 3% in the two weeks after January 17, when the coronavirus outbreak first made headlines. Since then, the index has bounced back to all-time highs.”
Again, we don’t know the ultimate impact, but the market doesn’t like uncertainty, so we tend to react first by overreacting (the stock market, especially). Is it likely that a virus can decrease the full discounted value of the largest 500 companies in the United States by 3% in a single day? Or 7% in 3 days? Here are a few statistics to put some of this volatility in perspective:
- Multiple sources (WSJ and Barron’s) have estimated the potential economic cost at $400 billion (if the bulk of the cases stay in Asia) or as much as $1.1 trillion if it continues to spread around the world. That sounds like a lot of money. It is. But the total GDP of the world in 2018 was approximately $85 Trillion. A $1.1 trillion cost is approximately 1.3% of global GDP. As a comparison, the US GDP fell 4.3% during the Great Recession from peak (late 2007) to trough (2nd quarter of 2009).
- The value of publicly traded equities grew over $17 trillion in 2019. A three-day, 7% drop in the S&P took us back only to mid-December values. I don’t want to dismiss a 7% drop in the S&P, but we were only recently celebrating all-time highs on the S&P, and after the past few days, we’re still very close to that.
Ultimately, despite the volatility in the market, remember that we started first with a financial plan specifically for you, to represent your goals and plans. Stock market investing is, by its nature, a long-term proposition (as of 2011, in Nick Murray’s book Simple Wealth, Inevitable Wealth, he calculated that 89.5% of all 5-year rolling periods on the S&P 500 have generated a positive rate of return, and 96.4% of 10 year periods. This is what we mean by long term. Not 1 month or even 3 years). No matter the source of volatility, it has always come and gone and will come again, and we need to expect it at any time and prepare for that. Your individual asset allocation is built with that in mind. For those of you taking distributions or will be in the near future, we have been able to plan for how much you need and when you will need it. The earmarks we’ve set aside for near-term withdrawals are invested in asset classes that have shown significantly different return and risk characteristics than the S&P specifically, or equities in general. We’ll continue to monitor this on a daily basis and please let us know your thoughts, how you’re feeling, and if you have any questions.