Monday was a day for the record books. As SMI executive editor Mark Biller said late yesterday afternoon on MoneyWise Live, "If you've wondered, 'What does financial market panic look like?' this was it."
Mark explained why the turmoil was so pronounced — and he offered guidelines for responding calmly and thinking about the current upheaval both strategically and biblically.
To listen to a portion of the program, click the play button below — or, if you prefer, scroll down for a transcript. (For more radio appearances by members of the SMI team, visit our Resources page.)
MoneyWise Live, with hosts Rob West and Steve Moore, airs daily at 4:00 p.m. ET/3:00 CT on Moody Radio.
To ask a question on a future program, call 1-800-525-7000 and mention you have a question for either Mark Biller of Sound Mind Investing.
Steve Moore: Great to have you aboard today on MoneyWise Live. Our host is Rob West. My name is Steve Moore. Later in the broadcast, we'll be taking your calls and questions — but first, it's been another volatile day on wall street, largely due to the ongoing coronavirus crisis. Mark Biller, a good friend and executive editor at Sound Mind Investing joins us now for a recap and, Rob, to help us keep things in perspective.
Rob West: Well, that's exactly right. We want to keep things in perspective, both financially and biblically as Christ-followers. We want to know what God's word says about how we should think about managing his money, and that includes our investments, but in times like this, we realize there can be some of you out there who have some built-up anxiety, perhaps even some fear. We want to replace that with faith and trust ultimately in the Lord, but we want to do that in the context of what's going on around us.
Mark, I'm reading the headline now that the markets are closed and it officially reads: "The Dow sinks 2000 points in the worst day since 2008." With that as our backdrop, we're glad you're here on MoneyWise Live.
Mark Biller: Well thanks, guys. Glad to be here.
Steve Moore: Yeah, put a smile on our face if you can, Mark.
Mark Biller: We'll try.
Rob West: Hey, Mark, Steve mentioned coronavirus and that's certainly part of it, but there was a new wrinkle in the equation today. Help us unpack it.
Mark Biller: Yes, the oil market was the big new addition today and people are maybe thinking of themselves oil. What does that have to do with anything? Well, the backdrop here is most listeners I'm sure are probably aware that Saudi Arabia and Russia are two of the world's biggest oil producers. What is a more recent development that some listeners may not be aware of is the United States in recent years has actually become the world's biggest oil producer — even bigger than those two.
So what happened is, last week, OPEC led by Saudi Arabia was trying to get Russia to agree to some production cuts in oil — because they can see the handwriting on the wall, they see the global economy is slowing because of what's going on with the coronavirus. And so they're trying to manage oil prices — to keep those propped up in the face of reduced demand. So they were having this kind of high-stakes game of chicken between the two of them.
And when Russia declined to meet OPEC requests, Saudi Arabia turned around and said, "Well, fine —then we're going to cut oil prices and we're going to ramp up our own production." So this was kind of the playground version of, "Well fine, I'm going to stick it to you then." And neither of them were necessarily targeting the United States in this. This was more between the two of them. But at the same time, I don't know that either one of them are crying any crocodile tears over the headaches this is going to cause for the U.S. shale producers.
So you've got to kind of got a three-way triangle here. And the net effect of all this, Rob, was that oil closed today down 25% from its level just on Friday at the close. And that's the worst day in the oil markets since 1991, which was the first Gulf war.
Rob West: Help folks understand why this is important because, you know, even the president was tweeting today about the fact that lower oil prices means lower gas prices. That sounds like a good thing. And yet part of the reason that we have become now — this is new on the scene, relatively speaking — the world's largest oil producer is through new technology including something called fracking. And we don't want to get into the weeds on this, but there's a point at which that is no longer profitable as the oil prices decline.
Mark Biller: Yeah, you're right. And there, there are really three main aspects to this. So first of all, it's obviously not just this oil news that was roiling the markets today. It's this huge new uncertainty of what does the oil impact mean on top of everything we've already been dealing with for the last few weeks. So that's the first thing.
The second is that, what you alluded to just now, while in the past we've always been trained to think of lower oil prices as being good for the U.S. consumer and good for the U.S. economy, now we've got to balance that against the fact that our energy sector is much larger. So anything that hurts our energy sector, now we have to be thinking in terms of layoffs, lost wages — and bottom line, I would say that the risk of a U.S. recession likely went up a little bit today because of the potential impact this has on our energy companies here in the States.
And then the last reason that is not obvious but is important is that the financial markets are very aware that this potentially really has a big impact on credit markets — the debt markets, bond markets. And that's because the energy sector is very highly leveraged, which means — that's a fancy way of saying that a lot of energy companies carry a lot of debt. So not only are those individual companies in danger of potentially not being able to make their debt payments — as you were saying, these lower prices make it hard for them to meet those debt payments — but also you have to follow the money here. All of that debt is owed to somebody. So now the banks that loaned the money to these companies, they're more at risk. And you can see that all around the globe. Bank stocks were getting hit very hard today because of the impact on energy companies and all that debt.
And I think one way to really see that is energy companies only make up about 3% of the S&P 500 stock index. But those firms represent about 10% of the so-called junk-bond market, the riskier non-investment grade bond market. So at 10% of that market, that's a pretty big slice. And all of a sudden that's all looking pretty shaky.
Rob West: Mark, if we were to add one more factor into the equation, if we head into a recession this year — and certainly as you said, nobody knows the chances of that happening are probably higher than they were certainly 30 or 60 days ago because of everything you just described — but if that were to be something that works in the favor of the Democratic nominee, which at this point it looks like it perhaps is, at least based on what we know today, going to be Joe Biden — we also have to factor in what we know about his take on corporate taxes and the economy and some of those factors as well, right?
Mark Biller: Yeah. That's certainly not going to be viewed as a favorable thing. Now I will say that versus just a few short weeks ago when it looked like maybe that was going to be Bernie, the markets are probably pretty relieved to be looking at a possibility of a President Biden instead of a President Sanders. But yeah, you're right. That's not helping things either.
Rob West: Mark this is obviously a lot to digest. So we're talking today about the worst decline in the stock market since 2008. Help us put that in context with history as we evaluate what's really going on here.
Mark Biller: Yeah, I think the biggest piece of perspective that I would encourage people to think about today — yes, today was miserable, yes, the last couple of weeks have been very volatile, although a lot of people would probably be surprised to realize stocks actually were slightly up last week given all the volatility and the scariness and the headlines — but I think for perspective here, we need to pull back a little bit.
So today just happens to be the exact 11th anniversary of the financial crisis lows for the stock market back on March 9th of 2009. And in those 11 years, we've had three prior instances where we've had stocks down roughly the amount they are today. So in 2010 we had a 16% drop, in 2011, 19.4%, and then 19.8% in 2018 — so we've had three big drops like this.
Each of those was very scary at the time. Now what each of those had in common was the U.S. Did not slip into a recession in any of those three. And in each of those three, the market bounced back very quickly. People who took, you know, dramatic protective action, we're regretting it because of the sharp bounce back and stock prices. And that's why we've been saying you don't want to rush to make big adjustments to your portfolio because more often than not, it's not the big one, and it's not going super deep, and you're probably going to regret selling into the teeth of that volatility.
So I think that's a little helpful perspective. We're not past the point of those three priors that we've had during this bull market yet.
Rob West: Let's turn the corner with some hope and encouragement for two specific groups of people. We have some listeners out there that might put themselves in the "younger investor" category. Why might they have hope in the midst of this market turmoil? And then, talk about that not-so-young investor and some hope for those folks.
Mark Biller: Yeah, absolutely. So let's start with the younger investor. And by that, we're really talking about anybody who's, you know, age 50-55 or below. So you've got quite a bit of runway still ahead of you on your investing timeline. For those folks, I would really encourage them to just push through this current panic in the financial markets.
And that's what we had today. We hit panic today. So if you've wondered what does financial market panic look like, this was it today.
But for these younger folks, what you need to take away from this is: Bear markets, really, bottom line, are a good thing for you — and it doesn't feel like a good thing when you're going through it. It's no fun looking at the temporary damage in your account statements because you probably as a younger investor, you probably have a very stock-heavy portfolio. But the reality is that with you in your portfolio-accumulation phase, where you're building that nest egg, you have the ability after a bear market — through a bear market and after a bear market — to buy significantly more stock with the same regular 401(k) or IRA contribution that you're making every month or every couple of weeks.
So I would highly encourage those folks — the younger folks — don't stop making those contributions. Don't panic along with the market and change your allocations and pull all your stock holdings out because of market fear. Those dollars are stretching further for you right now. You just have to wait to see that come to pass. And if you've got 10 years or more, you can all but guarantee the market's going to be higher then than it is now. So just sit tight, keep making your contributions and take advantage of that dollar-cost averaging.
Now, where it gets a little bit harder, Rob, of course, is for those not-so-young, not younger investors, but hope is not lost for those folks either. You know, we've talked many times over the last year about how older investors should be tilting their portfolios more towards bonds and away from stocks. Hopefully, listeners have been taking that advice and if they have, it's very possible their portfolios are actually in better shape than they realize.
The reason that I say that is as poorly as stocks have done over the last three weeks or so, bond returns have been fantastic. And what that means is the typical 60/40 stock-bond split — just looking at U.S. assets, ignoring international stuff — a typical 60/40 portfolio is probably only down 5 or 6, maybe 7% at this point [year-to-date]. And really in light of the headlines, as scary as those have been, I think most people would say 5-to-7% down isn't all that bad.
Rob West: Yeah, exactly right. Well, that's a really helpful perspective. Here's what we're going to do, Mark, we want to keep you over for one more segment. When we come back, we'll look at the biblical perspective — and we'll do that right around the corner.
Rob West: You know, if you were sitting there watching the news headlines today and you were watching in the closing moments of the stock market trading today, the Dow continuing to drop off, and then you saw it cross 2000 points down and your blood pressure may have been rising. Well, our goal is that hopefully at the end of this broadcast you can take a deep breath and feel a lot better. And one way to do that, Mark, is to go back to God's word because that's where our hope should reside.
Mark Biller: Absolutely, and there've been two verses that really have been going 'round and 'round my head the last couple of weeks, so I'm just going to share those with listeners. Hopefully, they'll help you as well.
The first one is James 1:5 and that says, "If any of you lacks wisdom, you should ask God who gives generously to all without finding fault and it will be given to you." And the second verse is Philippians 4:6-7 — very familiar passage: "Be anxious for nothing but in everything by prayer and supplication with thanksgiving, let your requests be made known to God. And the peace of God, which surpasses all understanding will guard your hearts and minds through Christ Jesus."
Rob West: That is great wisdom from God's Word that we need to hold on to. Keep in mind our hope and our trust is in him. He is our provider, not the U.S. government, not the stock market, our economy is not how we are provided for, it's God. And so that's where our trust should ultimately be placed.
Mark, really appreciate you stopping by my friend.
Mark Biller: Thanks, guys.
Steve Moore: Please remember that MoneyWise Live is a partnership between Moody Radio and MoneyWise Media. Our thanks today to our technical crew, Aaron Addison, Judy, Amy, and Jim. Thanks again to Mark Biller for being there — and thank you for being there. Join us again tomorrow!