As a financial advisor and an investor myself, I understand how emotionally unnerving it can be when we see the kind of panic we are currently witnessing in the markets - primarily due to the threat of the coronavirus pandemic. I wanted to take a moment to offer some perspective on where we are at currently in the markets as well as a longer-term perspective to hopefully help manage emotions and expectations with respect to your investments during this trying time.
The “Coronavirus Crash” is a Black Swan Event
First of all, if there ever was an example of a “black swan” event, this would be it. According to Investopedia, a black swan event can be defined as “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.” As you were likely aware, all signs in the economy were pointing to strong fundamentals with a fairly robust growth outlook until… this “coronavirus crash” seemingly came out of nowhere.
The Current Uptrend
To provide some context to this current correction, I’ve put together the following chart for some context.
The Standard and Poor’s 500 (S&P 500) is an unmanaged group of securities used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Past performance is not a guarantee of future results.
You may have heard me refer to “trend-following” as a method to help determine when one may want to be more aggressive or less aggressive with their portfolio allocation. You may have also heard me mention that tracking the trend can be as simple a taking out a purple crayon and drawing a line along the bottom of the uptrend to determine which direction the markets are currently trending. Well, as you can see, today’s price action is sitting right on a major trend-line in the S&P 500 that goes all the way back to 2009 when this current bull market started. If this line is breached in a significant way, the uptrend will end, which communicates that a more defensive posture may be warranted. If that happens, the next major support in the S&P 500 would be around the 2400 level. Note with me the speed with which the market has dropped from its highs. In the last three trading days alone, the market has gone from overbought territory to the most oversold it has been since the financial crisis in 2008-2009. Naturally it is difficult to predict but given the support from the trend-line and the irregularly oversold conditions, the market may be poised for a short-term bounce.
It’s Official - We’re In a Bear Market
The standard definition of a bear market is a decline from a peak to a trough of 20% or more. We’ve now officially crossed that threshold. However, it is interesting to note that even though we are in a bear market, we are still in a long-term uptrend as of today. Who would’ve thought that was possible, but when markets get as over-extended as they were and they drop as fast as they are today, it apparently is. We’re now in a bear market within the context of a long-term uptrend.
One thing worth pointing out is that bear markets are normal experiences in markets. Typically, a decline of 20% or more happens every 3.5 years on average. We haven’t had one in 11 years so one could argue we were overdue. The depth and length of the bear market is impossible to predict, but on average they last around 22 months with a decline of 42%. Analysts at Goldman Sachs have shown that bear markets caused by “event-driven” shocks (like the coronavirus) as opposed to economic fundamentals, average shallower declines of 29% and a duration of 15 months on average. Let’s hope that is the case for us today.
What Does This Mean Going Forward?
While easier said than done, panic selling in the middle of a fast-moving market has never proven to be an effective strategy. One wants to have a plan before experiencing these kinds of market swings. The best thing to do in a situation like this is to stick to your plan… no matter what it is. For those clients who have managed accounts with us, you know that we often preach blending investment strategies (i.e. Buy and Hold, Trend-Following, Momentum, Mean-Reversion, etc.) all of which have proven to work over time. Together, they create a dynamic asset allocation approach which tends to mean we get more conservative when the markets are trending against us and vice versa. We know that some of these will work better than others over the near term, but the point is to stay diversified to limit the overall risk in your portfolio and give you the greatest chance for long-term success.
Above all, keep in mind that this too shall pass. The market is desperately trying to price in the long-term effects of coronavirus so let’s pray that clarity materializes sooner rather than later.
This information is for general purposes and is subject to change without notice. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results.