We don’t normally share our blast emails to clients and friends of Bodnar Financial on the blog, but coronavirus fears are not going away anytime soon. For a dose of calm and common sense, keep revisiting this post for regular updates from NJ financial planner John Bodnar, CFP®, CIMA®.
Thursday, April 2, 2020
If you are like me, you have been consuming so much news over the past couple of weeks, it is becoming information OVERLOAD. For that reason, I am keeping this update short and sweet.
A few thoughts on the current situation. Where to begin?
If there is a single word to describe March 2020, it is “extreme.” In the span of a few weeks, we witnessed the fastest bear market in history. It included the steepest market drop in a single day since the 1987 stock market crash, but also the biggest one-day recovery since 2008. (It’s a valuable refresher course in market volatility—don’t try to time the market, just get in.)
The main driver of this extreme volatility is uncertainty. We are at a moment of maximum uncertainty. The pandemic has become the most significant public health crisis in a century since the 1918 flu. We are not sure when the outbreak will subside, and part of our response has been to put the economy into a medically-induced coma until it does.
We are applying massive monetary and fiscal stimulus to the economic collapse, which will probably be deep but relatively fleeting. The short-term outcomes are unknowable. Everything that follows is based upon the undeniable fact that nobody knows what the world will look like in the next few weeks. And the markets HATE that.
People hate it too—I know I do. The Dow and S&P 500 had their worst first-quarters in history, and spoiler alert: for those who check quarterly statements, they will be down. We may even see another sell-off before this whole thing is over. But we have to fight the fear. The hallmark of a long-term, goal-focused investment policy is the practice of rationality under uncertainty.
Volatility itself does not lose money. Panic in the face of volatility loses money.
The circumstances of COVID-19 are unique. But recessions—and their inevitable recoveries—are not. Those we have seen before, many times. We have lived through several terrifying “black swan” events in our lifetimes, including the Financial Crisis of 2008-09, the Sept. 11 terror attacks, Black Monday 1987, and more.
Each produced a moment of maximum uncertainty, followed by great economic expansion with unprecedented episodes of soaring equity values and dividends. Don’t forget: after the March 2009 low—down 57%!—the S&P 500 compounded at over 14% annually for nearly 11 years.
What happens over the next few weeks is unknown. We don’t know which way the equity market’s next 20% move will go. But we know with crystal clarity which way its next 100% move will be, and I encourage you not to risk missing it. And, if you have children or grandchildren, you should encourage them not to miss it either.
Be of good cheer. This too shall pass.
PS: My belief that optimism is the only true realism will never change, but even I like to check my own bias from time to time. It is worth noting, while some of my more pessimistic industry colleagues view current circumstances differently, we are arriving at the same conclusion right now. Howard Marks’ brilliant March 31 memo, which I recommend for those who haven’t reached pure information overload yet, ends as follows:
“You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments. But the most important thing is to be ready to respond to and take advantage of declines. The world will be back to normal someday, although today it seems unlikely to end up unchanged.”
Tuesday, March 17, 2020
“My center is giving way, my right is in retreat, situation excellent. I shall attack.”
– French General Ferdinand Foch, 1914 Battle of the Marne
History may not exactly repeat, but it does seem to rhyme. It’s a newly coined version of an old saying, and I like it and have taken to using it often.
Speaking of old…I’ve been in this business since 1981, which means I have experienced the 1987 crash, the end of the Dot-Com era, the September 11 terror attacks, and the 2008 Financial Crisis. I feel safe in saying that—while what we are witnessing today is unique to the subject matter—the characteristics and market reaction to the phenomenon seem eerily similar to those we have witnessed before.
So, here we are again: the tide is now running out fast and panic selling has swept over capital markets, arriving at what will be characterized as the fastest bear market in history.
What Happened? (for my engineers, analysts, and other statistics hounds)
So, the bull market that began on March 10, 2009, is officially over. It lasted 131 months (2,756 trading days, and one month short of 11 years in duration). It was the 11th and longest bull market since the end of WW2, producing the second largest overall gain.
S&P 500 Market Peak: 3386 (on Feb. 19, 2020)
That bull market was a beast. It gained +529% (total return) or an annualized gain of 18.3% per year (total return), and set 255 all-time closing highs.
Then, the market began to dip. The S&P 500 fell 29.52% to 2386 on March 16, 2020. The fall was the fourth drop of at least 15%, but was the first decline of at least 20% that has occurred during the bull market that began on March 10, 2009.
The other three “near-bears” ended on:
- July 2, 2010 (off 16%)
- 3, 2011 (off 19.4%)
- 24, 2018 (off 19.8%)
In the 75 years from 1945-2020, the S&P 500 had 12 declines of at least 20%, or about one every 6.25 years. The stock market suffered its 12th bear since 1945 last week.
In the previous 11 bear markets over the past 75 years, the stock market recovered 100% of the loss sustained, going above the previous bull market high. The average recovery time from the low point in the downturn to a new high closing price was 24 months.
This one may be hard to believe: long-dated Treasury bonds (like the Fidelity LT Treasury fund that Frontier owns in its portfolios) produced a gain of 46.4% on a trailing 1-year basis as of the close of trading last Monday. That is called diversification, and we practice it here at Bodnar Financial.
Why Does the Market React This Way?
(This section may be a little too much Inside Baseball for some of you, but fight through it.)
This is one of those periodic storms that upend markets every so often (i.e., 1974, 1987, 2008, etc.). Their path, duration, and resolution depend on the causes and the response by authorities—although they usually share similarities (the rhyme).
Since the Financial Crisis, investors have been volatility-phobic, regularly overestimating risk, leading to sharp, scary market declines in 2011, 2016, 2018. These sharp declines were in response to events that conjured up visions of 2008, none of which came to pass. Instead, what we got was the greatest bull market in history, proving another old saying during this past decade: Wall Street climbs a wall of worry.
At this early stage, this market decline is acting with a speed and depth that reminds me of 1987. Thus, the perceived economic risk is considerably greater than other declines. But the real risk is still unknown.
In broad terms, we have an exogenous event—the virus—that initially caused a moderate shock to global supply by disrupting the flow of goods from China. That has now morphed into a major disruption in global demand as the virus spreads around the world and governments attempt to curtail its spread and its effect on public health by closing schools, canceling all sorts of events, banning large gatherings of people, curtailing travel and so on. The impact could be large enough to knock the global economy into recession.
Now here is the really important part: markets are discounting mechanisms. They are engaged in real-time information processing, constantly adjusting to shifting expectations and new information to create an equilibrium between supply and demand. There is no clean picture of a market—economic models are built for the classroom, not the real world.
Markets are complex and constantly changing. Those changes can be abrupt, violent, and frightening. In the past, entrepreneurs built the fastest steamship, not only to move freight, but to deliver information about the wheat harvest in the Ukraine or the supply of tulip bulbs from Holland—they wanted to have an insider ability to profit in the capital markets.
The ability of millions of dollars to move with the click of a mouse based on a tweet has changed the landscape, but it’s still the same. Information has always been the lifeblood of capital markets. Sometimes good information, and sometimes disinformation.
Predictions on the full potential global reach of the virus have been very wide ranged, from relatively benign to catastrophic (i.e., 1918 flu pandemic). The economic outcomes have a similar spread, which the market MUST consider. That is part of why volatility is so high, it reflects the uncertainty and potential impact of that range of outcomes.
When the market thinks authorities don’t get it—like Trump’s speech last Wednesday—BOOM, new information and the market reflects that immediately with a dip.
When the market thinks proactive measures are being taken—like Trump’s remarks last Friday—BOOM, new information and the markets react with a 2,000-point DJI swing in the positive direction.
The market typically overreacts to bad news. Not always, but mostly, and especially when what the economists call the “left tail” contains really bad possible outcomes. There is a survival benefit to overestimating risk in evolutionary theory. Bodnar Financial veterans may recall a prior white paper on “why it is so hard for humans to be good investors.”
The NYC/New Jersey hospital system—one of the best in the world—might be slammed hard. Depending on the severity of symptoms, coronavirus patients need beds in all levels of patient care, from the ER to the ICU. The ability of hospitals to meet the sheer volume of patients is unknown. The process could look like a python swallowing a pig, or it could look like a python swallowing a whale. We don’t know yet. Thus, the market volatility.
What does all this economic jargon really mean? Stock markets must price in ALL the things that can or might happen. Not just what you and I think will happen, but what EVERYONE thinks might happen. And because many more things might happen than will happen, we get these crazy swings. But, as these possible outcomes narrow, the market’s accuracy greatly improves.
What Happens Next?
When markets crack like this, the bulls warn you against a failure of nerve (Buy!), the traders warn you against hesitation (Do something!), and the bears warn you against staying the course (Sell!).
My advice: Imagine the future.
Imagine how amazing the world will look in 20 years. Today we stand, not at the end of an era, but at the end of the beginning of the greatest technological explosion in history.
Honestly, you ain’t seen nothin’ yet. Today’s teenagers will live in a world of designer drugs built for their own personal genome. Surgeons will be printing 3D organs, and families will be keeping in touch with loved ones using a combination of virtual reality and hi-speed internet that produces a result we can only describe as a miracle.
Now, put down this paper and think about what the world looked like when you graduated high school (leaded fuel anyone?), or what the office looked like at your first job (typewriters?), or just 10 years ago (Pick you up at the airport? Just take an Uber, Dad).
Many of us have been highly critical of the government response to COVID-19 at both the national and state level. Some still are. But in the past week, the complacency narrative and the “It’s Just The Flu” narrative have disappeared from every politician’s vocabulary. In the past week, wheels of innovation and problem-solving began turning in private companies and associations that were not turning before. And it makes all the difference in the world.
Here comes the old Bodnar optimism, and I know you won’t believe me, but I tell you it is true: THIS WILL BE OUR FINEST HOUR.
As the coronavirus situation continues to play itself out, as have all the previous crises that precipitated the 11 prior bear markets since WW2, it remains impossible for me to predict when and how this problem will be resolved. Likewise, it is impossible to know when and how the markets will anticipate this resolution.
I can predict, however, the media will persist in reporting this as an unprecedented crisis in the economic and financial life of the world, and suggesting that it is Armageddon.
But none of that is my true purpose on this St. Patrick’s Day 2020. My purpose is to suggest—as difficult as it may be—to take our focus off the onslaught of catastrophist headlines, and put our focus where it belongs: on your goals (and those of your kids and grandkids), on the plan that you and I set out for the achievement of your goals, and on the portfolio we created together to fund your plan.
Because at the end of the day, I don’t run money. I run a financial planning practice that seeks to help clients achieve their life goals with a sense of security. You can look it up…it’s on the website!
Bodnar Financial (and by proxy, all of you) have elected to be guided by history as opposed to headlines. Rather than subscribe to the media’s revolving insistence that “it’s different this time,” we respond instead with “this too shall pass.”
You would not be human if you didn’t experience some degree of fear at the direction of current events. The great achievement, at times like this, is simply not to give in to the fear. In a very real sense, as I told a client on the phone today, my whole job is helping you toward that achievement.
A bear market is the acid test of how effective my work has been, and, the best way I know how to do that is by encouraging you to stay the course.
Thank you for being my clients. I’m always here if you need me.
Like General Foch, may we see in the adversity an opportunity. Use this time to fund your IRAs, 401ks, retirement plans, and 529 plans early. Increase your % contribution into your 401k, 403b, etc. for the next few months. Take advantage of the sale going on.
If you have cash that you have accumulated to take advantage of special situations….now would be that time. Take advantage of Warren Buffett’s investing axiom: “Be greedy when others are fearful.”
I know not the hour nor the day…but a stock rally is coming.
For a printable version of this update, click here.
Thursday, March 12, 2020
In the past few weeks, I’ve seen comparisons between the current stock market volatility and the Great Recession of 2008-2009. As I write this—at 5:00pm on Thursday, Mar. 12, 2020—I contend these similarities are overblown.
The Dow Jones Industrial Average is down 28% from its record high last month, about half the 53% drop witnessed during the 2009 Financial Crisis.
*Editor’s note: Feel free to take some deep breaths here before reading on.*
This is the moment we have been waiting for. We’ve enjoyed the longest running bull market in history, which started in March of 2009 and lasted for over 11 years. Coronavirus and oil price wars may have been the perfect excuses for this market correction—but it would have happened anyway, one way or another.
Why? Because this is what the stock market does. It makes portfolios rise and drop, sometimes within the course of a single day. The thrill ride of market volatility is not for everyone, but if you can stomach it, you will have the privilege of participating in the largest wealth creator in the history of the world.
At this point, veteran clients of Bodnar Financial can recite our unofficial office slogan by heart: “We don’t do Armageddon here.” Many of us surfed alongside each other on the waves of market panic during the Financial Crisis, and reminisce on those days like old war stories. If you are one of those people, you already know what this white paper is going to say.
But for those new to our office—welcome to the big show. This may be the first time you’ve read the phrase “bear market territory” in the news while having some skin in the game. That sinking feeling in your gut? That is market volatility. Your response to that feeling is what will separate the JV investors from the varsity.
We are not—I repeat—we are not—in Financial Crisis territory right now. That being said, we can learn an important lesson from what happened back in 2008-2009, and how the actions you take today will determine your success or failure as a long-term investor.
Let’s climb in the time machine and go back to 2007…
On Oct. 9, 2007, the Dow hit its high, closing at 14,164.
By March 5, 2009, it had dropped more than 50% to 6,594.
In the months between those dates, the media entered full-on hysteria.
Three investors read the headlines in disbelief: Peter the Panic, Karen the Calm, and Brody the Brave. Each had stock portfolios valued at $100,000 when the Dow closed at the high in 2007.
When the market hit bottom in 2009, their portfolios had dropped to $46,600. It was not a great feeling. Here’s what they did.
- Peter freaked out and moved everything to cash. He took his $46,600 and ran to Wells Fargo to open a savings account.
- Karen stayed the course. She didn’t sell any stock, but she didn’t buy anything either.
- Brody doubled down. He had $20,000 in cash, and bought more shares in his portfolio. Stocks were on sale, and he was determined to take advantage of the discount.
What happened next was not as glamorous or exciting as the stock market drop itself. The economy slowly recovered, and the Dow began to climb upward once again. The recovery wasn’t a straight line—it was more like zigs and zags:
Years passed. The sun continued to rise and fall, and so did the stock market. In other words, life went on.
On Feb. 12, 2020, the Dow Jones enjoyed its highest closing on record at 29,551.
And when the media began writing stories on the 11th anniversary of the Financial Crisis, our three investors paused for a moment to reflect on where they landed up.
Peter had opened a savings account with an interest rate of .01%. He did not spend any of the money over the 11 years. In Feb. 2020, his savings had grown to only $46,651.
Karen did not touch a single investment. She made her normal nightcap a double, turned off the news, and held on until the storm passed. In Feb. 2020, her portfolio had grown to $279,810. She nearly tripled her money by taking no action at all.
Brody had invested an additional $20,000 into stocks at the 2009 market bottom. His friends gave him grief, but he didn’t care. When asked if a low market was bad, he responded with, “Bad for whom, the buyer or the seller?” In Feb. 2020, his portfolio had grown to $385,327. By investing an extra $20,000 and laughing in the face of fear, Brody beat Karen’s portfolio performance by over six figures.
We can run this experiment for any stock market correction, recession, and everything in between. The trends will always remain the same. History will continue to repeat itself. The stock market will continue to zig and zag on its clumsy upward climb, because as history shows us, that’s what the stock market does.
Like most things in life, investing is 10% what happens to you, and 90% how you respond to it.
Tonight, the Dow closed at 21,200.
Which investor are you?
Monday, March 9, 2020
Today–March 9–is the eleventh anniversary of the crescendo of global panic that marked the bottom of the bear market of 2007-09. You can’t make this stuff up. It is to me a thing of the most wonderful irony that the world has elected to celebrate this iconic anniversary with–you guessed it–another epic global panic attack.
At this morning’s opening level of 2,764, the S&P 500 is down over 18% from its all-time high, recorded on February 19. Declines of that magnitude are fairly common occurrences–indeed the average annual drawdown from a peak to a trough since 1980 is close to 14%.* But such a decline in barely a month is noteworthy, not for its depth but for its suddenness.
As we all know by now, the precipitants of this decline have been (a) the outbreak of a new strain of virus, the extent of which can’t be predicted, (b) the economic impact of that outbreak, which is equally unknown, and (c) most recently, the onset of a price war in oil. (That last one is surely a problem for everyone involved in the production of oil, but it’s a boon to those of us who consume it.)
The common thread here is unknowability: we simply don’t know where, when or how these phenomena will play out. And in my experience, the thing in this world that markets hate and fear the most is uncertainty. We have no control over the uncertainty; we can and should have perfect control over how we respond to it.
Or, ideally, how we don’t respond. Because the LAST thing in the world that long-term, goal-focused investors like us should do when the whole world is selling is–you guessed it again–jump on the bandwagon and sell. Indeed, I welcome your inquiries around the issue of putting cash to work along in here.
On March 3, the erudite billionaire investor Howard Marks wrote, “It would be a lot to accept that the US business world–and the cash flows it will produce in the future–are worth 13% less today than they were on February 19.” How much truer this observation is a week later, when they’re down 18%.
Be of good cheer. This too shall pass. And please, wash your hands before you call me.
*JP Morgan Asset Management’s Guide to the Markets, page 13
Friday, February 28, 2020
“The Dow drops 4,400 points to 25,000. Say that two times out loud…. The Dow drops 4,400 points to 25,000… the Dow drops 4,400 points to 25,000. The financial pundits would have a field day predicting Armageddon. The market correction would eventually disappear, as mysteriously as it arrived. And it is my greatest hope that during that time—if this white paper has provided you any value at all, my dear reader—you would have done absolutely nothing.”
– Excerpt from a white paper written by yours truly on Feb. 7, 2020
We find ourselves at another Friday afternoon where I feel it may improve your weekend spirits to hear from your smiling financial planner. After returning with dividends some 46% in the 55 weeks through Valentine’s Day, the stock market was almost desperate for an excuse to correct. The coronavirus was (and remains) that excuse.
For those new to investing, welcome to the thrill ride of market volatility!
Volatility is a natural part of the stock market. It is also a cause of anxiety, but fighting through that anxiety is what separates the successful long-term investors from the jittery “market-timers” and .01%-return savings accounters who have tragically let fear prevent them from participating in the largest wealth creator in the history of the world.
Like all equity market panic attacks, this one will shine a light on those investors who are never going to make it. In this moment of media-induced hysteria, please remember this:
Temporary market drops are not losses. Drops only turn into losses if you sell.
Resist the urge to cash out all your money and bury it in the backyard. Quarantine yourself from the news, and take a page from the Warren Buffett playbook: make your normal nightcap a double, and HOLD ON.
This too shall pass. Optimism remains the only long-term realism.
Until next time,
John Bodnar, CFP®, CIMA®
P.S. from the Proud Poppa Department: My daughter and her husband are pondering whether to buy stock now, or wait until later for the market to drop even further. If you are sitting on cash, you might be wondering the same.
None of us have a crystal ball to predict the future, so I cannot provide an exact day the market will bottom out—but I do know my daughter is running in the right direction. Call the office if you are sitting on cash and want to discuss your investment options.
Friday, February 7, 2020
I have a theory that if three or more clients contact me on a single subject, it means ten times that amount are thinking about it, and the subject requires a response. Herewith is that response regarding Coronavirus.
Enjoy the attached Bodnar Financial White Paper. A little light reading for your Friday afternoon.