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Bull Markets Don’t Die of Old Age


But this one died from a virus.

Well, here we are; officially in the throes of the 2020 bear market. In our October 2019 quarterly letter, we pointed out some recession indicators (notably the inverted yield curve) but remained optimistic due to strong economic data.

It’s weird to have a crash which seems so explainable. We don’t have to analyze any indicators, decipher complicated financial jargon, or blame industry practices run amok. Why are we in a bear market? An infectious disease is disrupting all sorts of economic activity. That’s it; that’ll do it.

When you read about the 1929 or 1987 crashes, the stories involve some combination of speculative bubbles and leverage, slowing economic trends, and unstable combinations of new financial technologies. 2001 was a notorious bubble. 2008 saw the ingenious creations of subprime debt and collateralized loans terrorize the populous like Frankenstein’s monster. In 20 years when you read the Wikipedia page for the crash of 2020, it might say something like “everyone got a virus, so the market crashed.”

OK, it’s not quite that simple. There are other factors at work here, such as the monumental tanking of oil prices. The market could keep going further down. The Financial Times asks, “will the coronavirus trigger a corporate debt crisis?” Sure, it could. If earnings are hit hard enough, companies could have trouble paying their debts, which then is bad for the banks who loaned them the money or worse for the non-bank lending operations which have yet to be truly tested!

But alas, like all predictions, this is conjecture. There was no shortage of predictions on how the bull market would end. A lot of people theorized that the Fed is expanding its balance sheet too much, banks reverting to their old 2006-era tricks, or bond market liquidity would be its ultimate demise—not too many people picked virus.

In a larger sense, some of those other theories might still be true. The basic mechanism of market cycles is that times are good, leverage increases, risks build up and are widely ignored, and then some unpredictable hiccup, changes the mood. The cycle turns, leverage is unwound, there are forced sales of assets, and all those built-up risks suddenly become the problem.

The difference, in this case, is that the hiccup itself is big and salient enough to be considered the problem. Investors have been looking for a reason to sell (Bloomberg’s Michael Regan wrote that this was “the most unloved bull market”) and markets are almost always down in the first half of Presidential Election years. It feels like the S&P 500 was mid-trip and then got pushed to the ground.

The good news is that, unless the coronavirus proves to be stubborn, the economic data is still strong and suggests resilience against any pent-up risks. The second half of Presidential Election years is almost always positive. Now that investors no longer have that pesky thought of “this market has to crash at some point,” valuations may start to look attractive when the panic subsides. 6 months from now, all we’ll be talking about is the next Presidential Election.

For those reasons, all in all, we remain optimistic for 2020. But here we are, to remind you, of the things that are still true and will always be true, both now and forever, coronavirus or no coronavirus, bull market or bear market:

  1. Your financial plan isn’t going to change. It’s a good time to update and review, but this is why we plan in the first place. Whether you are retired or working, young or old, saving or taking income, this has been a very real possibility. For savers, market crashes are buying opportunities and for income-takers, this is why cash planning is crucial—Treasuries and CDs don’t go down with the market!
  2. The end of the world only comes once. And if it does, the value of your portfolio will be the last thing that matters. Remember, in markets like this, the only time that money is lost is when you sell. We’ve planned for this—stay invested!
  3. Nobody “called this”. Well, fine; a lot of investors have been calling a bear market for a while now (see above). And sure, eventually, the market had to come down. But it doesn’t take any level of talent to predict a bear market for 10 years and the opportunity cost of that was about 23,000 points on the Dow.
  4. All-in or all-out are both equally bad strategies. Market timing is a fickle mistress. If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five-year Treasury notes (i.e. all the returns would have been lost). The catch is that the 25 best days are frequently clustered among the 25 worst days. You can’t have the up without the down.
  5. There are things you can do right now. Be proactive and take advantage of the moment we’re living through
  • Up your automated 401(k) contributions at work. Raise your equity exposure if appropriate given your time horizon.
  • For that matter, increase any regular recurring contributions from your bank for money we won’t be spending today. The market is on sale!
  • Make sure your holdings set to reinvest dividends automatically rather than have these regular payments sit in a money market fund earning nothing. You’ll be buying more shares at lower prices.
  • Review your mutual fund styles. In markets like this, managers focusing on companies with high free cash flow will protect better if this problem starts to trickle into the rest of the system.
  • Make your one-time annual contributions now—529 plans, SEP IRAs, etc. You may not be getting the lowest price, but a 15% or 20% discount to the prices of a month ago will look like a steal in the future.
  • If you trade stocks, (this is not a recommendation) buy some of the names that you had wished you bought before or during the bull market. If you were kicking yourself for not buying Amazon or Tesla or Exxon 5 years ago, now may be a great opportunity!

And, perhaps most importantly…

Stay calm. Turn off the news and grab a book. Take the dog for a walk. Exercise.

Call us. We are here to help you. Market turbulence like this is never easy, but it gets a little easier when you remember that we’re in this together.

Daniel B. Brady, MBA, CFP® Partner, Senior Financial Planner

Richard W. Bell, Jr., CKA® Partner, Senior Financial Planner
Jay D. Ahlbeck, CLU®, ChFC® Senior Financial Planner
Brandon J. Abe, CFP® Associate Financial Planner
Paul C. McClatchy, MBA, CFP® Senior Financial Planner