With yesterday’s 5% decline in the stock market, we are officially in a bear market.
Just a few short months ago, economists were saying that recession was no where in sight and that we’d see growth across global economies.
However, the Covid-19 virus, which has resulted in the death of over 3,000 people globally, has sparked large-scale quarantines and lead to a drop in manufacturing and production, as well as the food, entertainment, tourism and travel-related industries.
This will lead to a slow down in our economy, and may even lead to a recession.
The virus, and fears of a quarantine have also led to a panic, causing shortages of hand sanitizers, gloves, face masks, toilet paper and basic necessities. There have even been cases of people selling hand sanitizers for $400 a bottle on Amazon.
As an aside, if you find yourself in need of a hand sanitizer and can’t find one, buy isopropyl alcohol 70 (or higher) and aloe vera gel. You should be able to buy both from your local drugstore for under $10. Just mix them together, and you’ll have a perfectly acceptable substitute.
Hopefully, concerns over the pandemic will blow over by summer. And any recession will likely be short lived.
The Federal Reserve has already acted by cutting interest rates 0.5%. This proactive stance and increasing of liquidity should help small businesses who need to borrow money to stay afloat.
However, the stock market has reacted negatively to the news, with global markets down at least 15%. US large-cap and small-cap stock funds are down even lower, at 20% and nearly 30% respectively.
Aside from our general exposure to Emerging Market stocks, we also have an explicit allocation to Chinese stocks, via a fund that excludes any state-owned enterprises. This indirectly creates a slight overweight to the technology sector and ironically, has been one of the better performing funds this year – it’s down only 2.2%.
On the other hand, our US Bond fund is up 2.5% and our Gold fund is up nearly 8%. About 3 weeks ago, as soon as the news of the Corona virus broke, we increased our exposure to gold in all of our client portfolios to 6%.
While gold doesn’t usually beat inflation, in uncertain times such as these, it provides a necessary ballast to our portfolios. It’ll give us an opportunity to rebalance our portfolios, selling the bonds and gold that have gone up in value and buying stocks that are now on sale compared to just a few weeks ago.
Even if we see continued volatility in the markets, a continued slow-down in global economies and maybe even a further 10-15% decline in stock prices, I don’t think it’s time for us to panic.
Apart from the virus-induced hysteria and recession, economic fundamentals are still relatively strong. Employment is still tight, inflation is low, and global central banks have expressed a willingness to provide liquidity and lower interest rates.
Markets usually see a 10-15% decline values every 2-3 years, and a 20-30% decline every 3-5 years. Despite these declines, stocks markets have been the best investment over the past century. I fully expect this trend to continue.
The forecasted returns over the next ten years for US bonds are 2-3%, US stocks are 4-6%, an International Stocks are 7-9%.
Uncertainty remains high, but our global diversification and focus on high-quality companies and investment grade bonds will allow us to weather the storm.
Meanwhile, we’re going to take advantage of this decline in the market to conduct some Tax Loss Harvesting in our taxable accounts.
Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns.
We have also been reviewing each of our client accounts and making sure we’re not taking undue risk in any of them.
If you have any concerns or questions, please feel free to reach out to me. I’m always available to talk to my clients.
Additionally, if you know someone who is panicking, feel free to send them my way and I’m happy to chat with them, review their portfolio and help alleviate any distress they may have.