When the Market Environment Gets Stormy, Rely on Your Instrument Panel

Apr 28, 2020
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Market conditions over the past two months have been as wild as at any point in at least a decade (since the Global Financial Crisis) and arguably dating all the way back to the 1929 Crash that kicked off the Great Depression. Here’s some of what we’ve witnessed since stocks hit all-time highs on Feb. 19.

  • Stocks made the fastest drop into bear-market territory ever, at roughly twice the speed of 1929’s (former-fastest) record.

  • This was followed by a dizzying stock market rally that wiped out half of the market’s losses in roughly three weeks.

  • There was huge volatility and a near seizing up of the Treasury bond market, normally one of the largest and smoothest functioning aspects of the entire financial system.

  • We saw a Fed rate cut of 1%, followed by more than a dozen interventions targeting all aspects of the financial system. They included the Fed buying bonds (Treasury, investment-grade, and high-yield debt), backstopping money market funds, lending to corporations and municipal governments, and setting up “dollar swap lines” with foreign central banks to facilitate the flow of dollars overseas — to name just a few specifics. One observer summed up the Fed’s $2 trillion+ interventions as “not just throwing the kitchen sink at the problem, but everything in the kitchen, including an old broken toaster.”

  • The Federal government provided more than $2 trillion in direct support to businesses and individuals.

  • Most recently, on April 20, U.S. oil-price futures plunged to a previously inconceivable negative $37/barrel.

That’s just a partial list, which doesn’t even directly address the uncertainty still surrounding the COVID-19 virus itself. We still don’t know how much of the population has been exposed, if a person can be reinfected, whether the virus will come back in the fall, or what an eventual re-opening of the economy might look like.

In light of these developments, should you make adjustments to your investing strategy? And if so, what would they be? If we could sit down for a cup of coffee and discuss it all — from an appropriate social distance, of course — I would answer your questions and perhaps allay some of your concerns. Short of that, let me try to put recent events into perspective. Here are a few things I think you should know.

  • Many of the key details remain “unknowable.” As frustrating as it is, until we get more certainty regarding the virus itself, everyone is merely guessing about the future path of the economy. And with no economic clarity, we have little basis to compare the depth of the economic decline against the massive emergency measures undertaken by the government and the Federal Reserve. Not enough? Too much? No idea.

  • Stock market investors are optimistic. By mid-April, the Nasdaq stock index was back in positive year-to-date territory, having regained its mid-January levels. For stocks to trade at roughly the level they did right before COVID-19 hit America’s radar, the market is pricing in an optimistic recovery scenario. Not everyone is on board though. As noted investor Howard Marks said recently about stocks being down only –15% from their highs: “The world is more than 15% screwed up.”

  • You should continue following your personalized long-term plan. With a well-considered plan, you can weather times like these both financially and emotionally. The past two months have illustrated the importance of having a mix of assets and strategies that balances your need for growth against your fear of loss. You might still be concerned about developments, but you shouldn’t be losing sleep.

  • If you’re following SMI’s Dynamic Asset Allocation and/or Upgrading strategies, you’ve already taken significant steps to reduce risk in your portfolio. Chances are you don’t need to take additional actions outside what these strategies have built in. That’s by design!

If you’re going to invest over many decades, you will have to weather a number of bear markets. These periods are characterized by uncertainty and fear. This is when it’s most valuable to be able to rely on the discipline imposed by a structured, proven approach to risk management such as SMI provides. When market storms come — and they will, repeatedly — it’s crucial to trust your instrument panel, rather than flying by the emotion of the moment.

Written by

Mark Biller

Mark Biller

Mark Biller is Sound Mind Investing's Executive Editor. His writings on a broad range of financial topics have been featured in a variety of national print and electronic media, and he has appeared as a financial commentator for various national and local radio programs. Mark also serves as Senior Portfolio Manager to SMI Advisory Service’s Private Client managed-account program and the SMI Funds.

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