A Light at the End of the Tunnel

First of all, I am very happy to see new data coming in these last few weeks indicating the Virus is far milder than initially believed. Although the World Health Organization initially indicated at least a 3.4% fatality rate, it appears the fatality rate may even end up closer to 0.05% – 0.4% roughly in the range of the flu even without a vaccine in place.

It appears the risk to young, healthy people is negligible while the older population is at greater risk especially if there are certain other pre-existing conditions present. A large portion of deaths, around 50% in some regions, are in nursing home populations. Lockdown policies around the nation should account for these facts and disparities.

We’re also starting to see COVID-19 hospitalizations waning. There were but a few overwhelmed hospitals, the nation has both excess ICU capacity and excess ventilators at this point contrary to the initial projections from the IHME and many States’ Governors’ offices. In fact, many hospitals around the nation are losing millions of dollars and furloughing staff.

In other words, the light at the end of the tunnel is coming into view. The market has been anticipating and rejoicing at this sight evident by the S&P 500’s ~30% rally from the March lows.

What’s Next?

While I believe the worst is behind us for COVID-19, I do not believe that is true for the U.S. stock market.

I don’t believe the economy will simply pick up where it left off in December/January. At least a couple months’ worth of GDP has been lost forever. Many jobs will be lost for years due to consolidation of roles, greater efficiencies in workplace, cautiousness about hiring, lucrative unemployment benefits and simply because many small businesses are going out of business altogether taking the jobs with them.

Households may be more cautious about their spending going forward than they were the last decade. This is a good thing as almost half of U.S. adults don’t even have $400 in the bank for an emergency and corporations were more leveraged than ever even before the pandemic. We need to be more prudent with our personal and corporate finances, but this implies an adjustment period.

Recall that before this pandemic struck, I was concerned about record high U.S. stock market valuations combined with extremely high levels of corporate debt in an already-slowing economy producing a relatively high probability of recession and severe stock market decline.

The Virus was certainly the catalyst and the policy of locking down the economy accelerated and magnified underlying problems. Yet, here we are, with the U.S. stock market down just 16% from its all-time high. Valuations are still in a historical extreme zone even though the economy has essentially been shut down for a couple months and will likely take many months to “normalize.”

In an attempt to support the economy during this unprecedented event, the Treasury is shelling out trillions of dollars while the Federal Reserve is printing trillions.

I’ve compiled a list of hypothetical loss scenarios to provide some perspective and assist in your risk management efforts.

In the first column, I show a hypothetical percentage decline from the all-time high on the S&P 500. The second column shows the implied price level resulting from that hypothetical loss while the third column shows the implied additional loss from current levels. The fourth column shows the first time the S&P 500 closed above that implied price level from column two. Column five shows years of appreciation wiped out as a result of the hypothetical loss and then the gain required to get back to even at the all-time high in the last column.

The first row is different than the others, however, in that I show the actual low for the current “Pandemic Bear Market” thus far, which hit on March 23rd.

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We notice the low for this downturn so far ($2,237.40 on the S&P 500) erased a little over three years of appreciation for a 34% loss and requires over a 50% gain to get back to the all-time high.

A 60% total decline from the peak would wipe out over two decades of price appreciation and would require a 150% return to get back to the all-time highs, this would imply about 52% loss from current levels as I write this on May 3rd.

So, how to proceed?

  1. Update your financial projections!
    1. Within those projections, you, or your advisor, should have incorporated market stress tests to test your ability to achieve your financial goals even in the event of a severe stock market decline.
    2. If your financial goals are jeopardized in those stressed scenarios then a change is warranted. Identify potential adjustments to your investment strategy that may better protect you and your family’s financial independence in a variety of market outcomes.
  2. Ensure the “safe bucket” of your portfolio is truly safe. There is a lot of risk hidden in seemingly “safe assets.”
  3. Ensure you have sufficient cash reserves.

Essentially, investors should be using the recent rally as an opportunity to revisit both their emotional and financial capacities for risk. How did it feel in mid-March when the market was down over 30% in just one month’s time? How did your portfolio hold up? Is this a second chance at making appropriate changes?

If you don’t know how to tackle these critical to-do items than please reach out to me. You have one shot to get this right. It is important that you’re not flying blind through these next several years ESPECIALLY if you’re nearly retired or recently retired.

I offer complimentary portfolio reviews to help identify total portfolio expenses, allocation analysis, portfolio risks and gaps, etc… From there we can see if it makes sense to work together on a long-term basis.

Please note, my investment minimum is $500,000 of investable assets. The purpose of maintaining an investment minimum is to ensure I can provide personalized, white-glove service for a lower cost to a smaller number of families.

Past performance is no guarantee of future results. This commentary is not intended as financial advice or investment recommendations but as education. Views are current only as of the date of writing and are subject to change without notice.