Coronavirus Quick Takes – March 26, 2020
March 26, 2020
With so much happening lately and many of us stuck in our homes, we thought it would be helpful to start offering more frequent, but shorter, newsletters. We’ll cover a few key points in each one, focusing on questions that we hear most often from clients and friends. Welcome to the first issue of Coronavirus Quick Takes. Today we will talk about the markets, but in subsequent issues, we’ll also address the economy and the pandemic itself.
How long will this awful market last? How bad will it get?
Obviously, there’s no way to know this for sure, but we can review previous bear markets to get an idea. Look at the table below. During the “average” bear market, the S&P 500 has fallen about –33%. At its recent low on March 23, the S&P 500 was down –35.4% from its all-time high, making this bear market already a bit worse than average. Given that, there’s little reason to think that stocks will fall significantly below this level, although we can’t rule out the possibility that the markets could revisit their recent lows later this year.
What about length? The average bear market lasts 254 days, or over 8 months. But during no bear market in history have stocks fallen as quickly as they have this year. Their rapid fall corresponds to what is likely to be a very dramatic decline in GDP. But at the same time, the recovery should also be relatively rapid, suggesting that the bear market will be on the short side. Note that the stock market leads the economy by 4 to 6 months. Thus, even if the economy doesn’t begin to revitalize until late August, that suggests the stock market recovery has already started. A secondary bottom later this year would imply that the recession won’t end until the final quarter of 2020, which seems a less likely scenario.
Does it make sense to raise a lot of cash now and wait out this bear market?
The short answer is No. Why? Because even if you were lucky enough to sell a lot of your stocks two weeks ago, before the bulk of the decline, you also have to know when to buy back in. Our own experience over a combined 80+ years of investing has convinced us that almost no one succeeds at this. We have countless stories of people who sold during bear markets, occasionally early but much more often very near the bottom. In all of these cases, they failed to buy back in until the market recovered a large share of its losses, leaving them worse off than if they did nothing. We’re sure there are some people who have succeeded in this maneuver, but we have yet to meet one.
Look at the graph below. It shows what happened to a hypothetical investor who sold out of stocks during the 2008–2009 bear market on September 15, 2008, right when Lehman Bros. declared bankruptcy. This investor didn’t avoid the entire bear market, but they did miss the worst part when the S&P 500 fell about -43%. They probably felt pretty smart, but when to buy back in? Not likely they did so on March 9, 2009 when the market finally bottomed. If they are like most of the investors we know who sold during the financial crisis, they waited a long time to re-enter the market, sometimes many years. Notice below how much better they would have done by holding onto their stocks rather than switching to bonds or cash:
Many of us dream of being able to time the markets. And for the vast majority, it’s just that—a dream. Staying invested, as uncomfortable as that can feel, typically provides the greatest rewards.
In our next edition of Coronavirus Quick Takes, we’ll talk about the economy in the time of COVID-19.
The KCS Investment Department
KCS Wealth Advisory is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with personalized financial, estate and tax planning services.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Other methods may produce different results, and the results for different periods may vary depending upon market conditions and portfolio composition. This email does not represent an offer to buy or sell securities.
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