Special Market Update: March 22, 2020


John Micklitsch, CFA CAIA, President & Chief Investment Officer

After another volatile week, stocks are down roughly 32% from their February 19th highs as measured by the S&P 500. Virtually all asset classes and markets are feeling the stress in one form or another. The speed of the drop and the opaqueness of the enemy, in this case, the virus itself, has left investor psychology particularly fragile. It always feels darkest before the dawn which is why it can be helpful to focus on what we do know along with several foundational investment principals that can help us build a strong mental bridge to when the virus has been defeated and our lives, work relationships and portfolios can return to normal. Here are some topics to consider in that regard.

  • Use history to establish context. Given the unprecedented social distancing measures and associated economic disruptions, a recession appears to be the most likely outcome at this point. A recession is defined as two consecutive quarters of negative real GDP growth. According to MKM Partners, over the last 100 years there have been 18 recessions and the average market decline associated with those recessions has been approximately 34%. As stated earlier, we are currently down 32%. Could markets go lower, yes, they could, but the 34% average decline gives us some frame of reference for where markets have gone in the past and sheds light on the magnitude of what is already reflected in stock prices. In addition, markets tend to recover roughly four months before the economic trough, which can make it very difficult to time the bottom. We don’t advise trying. High quality, oversold securities, even if not perfectly timed, should provide rewards to their new holders given enough time to recover.
  • Re-affirm what stocks are. This sounds obvious, but is worth reiterating at a time like this that stocks are long-term investments. An article this week circulated an old interview in which Jack Bogle reminded us, “In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that businesses earn. It over-magnifies everything.” We would add, just because there is a price quoted every day for the business, doesn’t mean you have to pay attention to it or act on it. Especially if the price doesn’t bear any resemblance to the business’ long-term value and you don’t have to sell. We remain steadfast that long-term business values do not change remotely as much as market prices can swing in the short run.
  • Investment vs. Speculation. With the fall in stocks, most portfolios have already experienced de-risking due to the market’s moves. A 60/40 stock/bond portfolio before the current market drop, is now currently weighted 52/48, so equity exposure going forward has already been reduced. This means further equity reductions may in fact not be necessary because it has already taken place. Any further de-risking or steps to deviate from one’s strategic, long-term asset allocation, assumes the investor knows more than the market, which is a form of speculation. It is more important, in our opinion, to focus on the investment attributes of the quality assets you hold rather than to speculate on what the market might do next. Because markets often do that which surprises the greatest number of people.
  • Remain optimistic. It is very easy to fill the uncertainty void we are experiencing right now with what could go wrong, but it is also worth noting what could go right. For example, there is incredible work being done in the health sciences field to bring therapeutics to treat and potentially cure the coronavirus. Some of them have been around for decades in the fight against HIV and are available in sizable quantities for both the sick and our front-line responders. When combined with other established medications, they create medical “cocktails” that could greatly alter the virus’ overall impact. At some point, treatments will be followed by a vaccine. The progress that is being made in the health sciences world during this pandemic will pay dividends for the world for decades to come. COVID-19 will most likely not be the last virus outbreak we face in our lifetimes, but you can rest assured that our new found need for preparation, what we have learned in the lab about virus sequencing, testing etc. will make us safer from this kind of situation rising to the current magnitude, ever again. But it will take investment to sustain it and that could involve sacrifices in other areas.

In closing, we are nearing the point of maximum uncertainty in this virus-induced selloff. We have taken unprecedented quarantine steps that are having a profound impact on our economy, but we don’t have enough time or data yet to see the results. We do know, however, that the market has priced a lot in already. The precedent for the severe steps being successful are out there. After a period of severe quarantining, China is beginning to return to normal. Apple and Starbucks have both re-opened their stores in China. This is a glimpse into our own economic return to normalcy. In the meantime, the Federal Government is injecting enormous amounts of liquidity into the economy to help us build the bridge to that return.

It is important to do your best thinking during periods of uncertainty. Ancora is working as a cohesive unit on your behalf to do just that. If there are any one-on-one discussions we can have to help you continue to think clearly, assess particular situations and make the best possible financial decisions for your unique circumstances, as always, please do not hesitate to reach out and we will hop right on a call to review.

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