There is an old Japanese proverb that goes like this:
Fall down seven times; stand up eight.
Right now, it is important to remember that proverb and heed the lesson. The financial markets are like so many other things. Sometimes it seems that we take two steps forward only to go one step back. But, to help understand our current situation, it is helpful to look back at similar times in the past. Each financial downturn is different, but all have common elements.
In 2000, sky high stock prices (especially in the technology sector) led to a long and messy return to more normal valuations for stocks. That decline in equities was the classic example of deflation of an asset bubble – when all at once, investors realized that the fantastic prices paid for technology shares were just not justified. This bubble deflation was a long drawn out affair with markets generally declining for 30 months.
The financial panic of 2008, however, was not the result of stocks being too expensive, but rather excesses in other parts of the financial universe causing a spiraling collapse. Banks, brokerages and other institutions who had built balance sheets that consisted of mortgage loans and other instruments that were suddenly worth much less than they appeared, shut down. The recession that spawned by this particular accounting reevaluation was long and severe and the recovery was complicated by holes in the fabric of the global financial system. The Federal Reserve and other central banks used many different tools to help the recovery along and Congress passed many funding bills and other bailout legislation designed to bolster the economy (remember TARP?).
Going back a bit further, in 1987 stocks declined by 22.6% in one day, Black Monday. The 1987 bear market was short lived, needing only three months to move from peak to trough. This one was precipitated by the proverbial “theatre fire drill” behavior when someone shouts “tire,” other people hear “fire” and suddenly everyone runs for the exits at the same time. Once everyone was in the parking lot, the realization dawned that there really wasn’t a fire after all, and people headed back in to finish the movie.
What will the eventual 2020 market decline and inevitable recovery look like? No one knows. The trajectory of this decline will depend on how quickly we can control the virus and how rapidly the economy responds when we all go back to work. As they do, markets will try to anticipate the actual events and will likely move higher once the uncertainties begin to clear.
It seems obvious, but it is worth noting that the bear markets of the last four decades caused periods of significant market decline. However, all were followed by a robust recovery once the bad news had been priced into the prevailing outlook. Each recovery was different, but all were significant in the year following the market bottom. Understanding this is vital to your financial health. In the last three super scary bear markets we’ve had, there were substantial returns once the selling stopped.
Bear markets are built on fear and this virus creates plenty of fear to go around. As usual, at this stage of an economic downturn, people are worried and perhaps even feel that this time really is fundamentally different. Of course, it is different. The illnesses and deaths in our communities make this a particularly personal and frightening time, but from a financial perspective, it certainly has similarities to other frightening times we’ve lived through.
As the curve of new cases flattens, stay at home orders will be eased. In fact, the three-stage “Opening Up America Again” plan was released last week with states to take the lead on implementation for their own part of the country. Eventually, everyone will go back to work, businesses will reopen their doors and the economy will begin to get back on track. Before that time, investors will begin to see light at the end of this dark tunnel and will start to move back into the financial markets. In fact, we may already be seeing this with the recent uptick in the markets. Since March 31, the DJIA is up 10.6%, the S&P is up 11.2% and the NASDAQ is up 11.1%. Of course, it is important to remember that we may also retest the lows before all is said and done, but the markets are certainly showing improvement from their March lows. Very likely parts of the market recovery will be swift and substantial and we’ll see a rush back into investments that look very attractive at reduced valuations.
But, reduced valuations are not the only reason for optimism in the economy and equity markets moving forward. The three stimulus plans already passed by Congress, and signed by the President, are breathtaking in size and scope and should help many families and small businesses stay afloat while waiting for the virus to abate and the economy to improve. The Fed has also taken significant steps over the last month to stimulate on one hand and to ensure a properly functioning financial system on the other. The lessons learned during the financial crisis of a dozen years ago were not wasted and, having built those sorts of initiatives before, neither the Fed nor Congress wasted any time in implementing even larger programs this time. These initiatives should help significantly over the next several months and there is already talk of additional stimulus programs being added as we move forward.
Many economists have made a sharp distinction between the current situation and that of the 2008 recessionary time. Banks are in good shape today, with ample reserves. While the immediate future is quite uncertain, we could begin to see economic activity begin to resume in the 3rd and 4th quarters. By contrast, in 2008 the financial uncertainty continued for quite some time and required substantial remediation for years. While it is probable that we will encounter a recession this year, and perhaps looking back will find we are already in one, many are hoping it is a short-lived affair.
Market declines like this one also create some investment and planning opportunities. When markets change as dramatically as they have, it is sometimes tempting to make changes to your plan. But the long view when investing is always the prudent approach.
Rest assured that the Atlanta Financial team is monitoring the financial markets and portfolio closely and making adjustments as conditions warrant. There are opportunities in times like these (more about that in our weekly communication next week). In the meantime, if you have questions or concerns, please contact your advisor. Everyone at Atlanta Financial is invested in your future and very happy to review our outlook and discuss any questions you may have.