The ‘COVID Quarter’ & Things to Remember When the Market is Down


Jeffrey van Fossen, CFA, Managing Director, Portfolio Manager

Over three months have passed, a full quarter, since February 19th when stock markets peaked and began a dramatic slide in the face of evidence that the coronavirus was a serious global threat, having spread beyond China. According to columnist John Authers of Bloomberg, “These have been three of the most extraordinary months in financial history,” as evidenced by this chart, which shows how various asset classes have performed over the past twelve months. The chart is normalized so that all of the indexes were at 100 on the February 19th market peak.

The Covid Quarter

The dispersion of returns is surprisingly wide, with global equity markets, commodities and REITS having all suffered serious declines. Gold and long treasuries are the exception.

The bullish-bearish-bullish volatility rotation has been breathtaking. It took the S&P 500 just 16 trading days to tumble 20% from the February record high, which was the quickest descent into a bear market since July 1933. It took just another seven trading days for the index to hit its March 23rd low, down 34% from the high. From March 23rd, it took just 19 trading days for the market to exit bear market territory, marking the shortest bear market since a similar 15-day stretch in November 1929. Since then, this new bull market has tacked on additional gains, leaving the S&P 500 down just 9% year-to-date, and taking it back to levels seen as recently as the third quarter of 2019.

Difficult as this time has been, it is not without precedent. Crisis markets are nothing new. In fact, bear markets born of surprise events are common. Since 1900 there have been 31 bear markets, or, on average, one about every three to four years. Bear markets, defined as a market decline of 20% or more, vary in duration and severity. Historically, the average bear market lasts approximately 1.5 years with a 26% decline.
Here’s a sampling of some of the more notable bear markets that have occurred over the years. Note that the “Pain Index” shown in the table gives perspective on how bad the episodes of decline were, considering not only the magnitude of the decline but also how long the decline took to unfold and how long it took to recover.

Largest Real Declines in U.S. Stock Market History

Largest Declines
Source: Kaplan et al. (2009); Ibbotson (2020); Morningstar Direct; Goetzmann, Ibbotson, and Peng (2000); Pierce (1982); Morningstar, Inc. Copyright 2020

For many investors though, the ‘COVID Quarter’ market feels very different. In fact, every crisis market is different. However, one thing is certain: crisis markets come to an end and bear markets are generally followed by rallies. To date, there have been no exceptions. So, the message is this: We have been here before and we have always recovered and eventually enjoyed new periods of prosperity as the economy repairs, reshapes and rebuilds itself anew. The U.S. and world economies are nothing if not resilient, and this has not changed. Nevertheless, here are some things you can do to stay on track when volatility does strike.

Don’t act impulsively.

Impulse and emotion are enemies of the intelligent investor. As Benjamin Graham (Warren Buffet’s teacher and author of the 1949 investing classic, The Intelligent Investor) said “The investor’s chief problem– and even his worst enemy– is likely to be himself.” In bull and bear markets alike, it pays to resist making portfolio changes based on emotion.

Follow your plan, not the herd.

“Beware the crowd during extremes” is sage advice. Remember that your personal financial circumstances are likely to change only relatively slowly over years, and therefore remain relatively constant, whereas the only constant in the markets is change itself. Avoid being “whipsawed.” By sticking to your plan, you vastly reduce the likelihood of “buying high and selling low,” the antithesis of successful investing.

Keep your balance.

A diversified investment portfolio (diversified both across and within asset classes) helps to mitigate losses and minimize concerns during crisis events and bear markets. Remain diversified. Resist the temptation to chase those stocks and market sectors that are doing well at the risk of being late to the party. Conversely, completely avoiding those areas of the market under significant but temporary duress may lead to lost opportunities in the future. It is often said that “one makes money in bear markets; you just don’t know it at the time.”

Make any necessary portfolio changes gradually.

Bear markets sometimes prompt clients to reconsider their risk tolerance. We find that over the years we have been very successful working closely with our clients to get their overall asset allocation correct. However, if you do find yourself consistently unable to sleep nights, call us to review your situation again in detail. If it becomes necessary to adjust, it is generally prudent to do so gradually. We counsel limiting asset allocation shifts to relatively small increments to avoid timing risk.

Tune out the noise.

In both bull and bear markets, the overwhelming focus of investment information on television, radio, and the internet is on short-term events and forecasts. In bear markets, this “news” coverage tends to be overly depressing, and in bull markets overly manic. Much of what passes for news is often little more than sound bites, just a micro snapshot in time lacking full context, balance and perspective. Worse, some reporting is factually incorrect or even purposefully misleading. Successful investors tune out this noise, know the full story and maintain a long-term focus.

Remember that many successful, long-term investors are scrupulously contrarian.

As Sir John Templeton, a legendary value investor once said, “Superior returns are most often generated by buying stocks at times of extreme investor pessimism.” Similarly, at the May 2008 Berkshire Hathaway annual meeting, Warren Buffett said, “If a stock [I own] goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Knowing he owned good long-term businesses, Mr. Buffett wanted prices to periodically go down, not straight up, so he can buy more shares more cheaply before they bounce back.

While this may be difficult to think of in times of market turmoil, it is precisely at times like these that long-term investment opportunities exist. If you have an investing time horizon of more than twelve months, the odds are very good that today is a far better buying opportunity than a time to sell.

“Stay the course” may sound cliché, but it is often the best advice in uncertain times. It is important to remember that no one can predict what the market will do over the short run. That is why a long-term focus is so important. Over time, ignoring the short-term and remaining focused on the long-term prospects for sound investments has proven to be a successful approach even considering the occasional, ugly bear market, which typically comes like clockwork every three or four years.

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