This week, we have seen pullbacks in stock markets around the globe. The potential for market sell-offs is a reality that we are always anticipating, and as uncomfortable as it is when it occurs, it is a normal part of the investment process. So far, the U.S. economy is solid and due to the sell-off, stocks are selling at more reasonable levels.
The following comments from our investment analyst, Caleb McSorley, will provide some insight on the decline, as well as some perspective about how these events often play out.
Markets have experienced quite a bit of volatility so far this week. As investors got more information about the coronavirus spreading to Italy, Korea, and Iran, fears were amplified about how this could impact the global economy.
If you remember our newsletter from the beginning of the year, we have been expecting volatility to return, we just did not know where it was going to come from. We also expect volatility to continue, if not from this viral outbreak, then the Presidential election. Markets do not like uncertainty, and there is a lot of that right now, but this creates opportunities for disciplined long-term investors.
First let us all agree that the media is not our friend. How does the media make money? They make money from advertisements, people watching their videos and clicking on their website. Most people are only motivated by two things, fear and greed. The easiest way to get views or clicks is by selling fear. There are plenty of articles with headlines that talk about how we just experienced the “Largest Two-Day Point Drop in the Dow’s History.” This should not be a surprise considering markets have been at all-time highs. It is better to look at the percentage change in the market instead of the point change.
The chart above looks at market corrections going all the way back to 1949. We typically experience three corrections of at least -5% every year, and one correction of at least -10% a year. The last time we saw volatility like that was at the end of 2018. Over the last three days the S&P500 has dropped -6.63% which is much more in-line with expectations.
Let us look at the same time period from a different perspective. The chart above shows every expansion and recession going back to 1949. The average recession has only lasted about 14 months. When the market recovers, it comes back fast, and we cannot afford to be on the sidelines. The biggest take away is that recessions can be painful, but expansions are powerful! Warren Buffet said it best “The market is the most efficient mechanism anywhere is the world for transferring wealth from impatient people to patient people.”
Many investors have been saying that this time is different. The impact on the global economy could be much larger because of the severity of the outbreak in China, where most companies get their supplies and materials. Due to the trade war with China and the tariffs that have come from that, many of the largest companies in the world have already begun to find new suppliers. It is still too early to know for sure what the economic impact will be, but U.S. companies have already begun to reduce the potential impact of supply shortages related to China.
It is said history does not repeat itself, but it does often rhyme. The chart above shows that this is not the first-time markets have been affected by a viral outbreak, and it will not be the last. However, no matter what the outbreak has been, markets have historically been able to recover to all time highs.
We have been preparing for the next inevitable recession and it is still too early to say whether this is the beginning of that recession. We remain long term investors with specific goals in mind, not letting short-term volatility affect our long-term plan.
We will continue to closely monitor this market situation as it develops and provide information to you. Please reach out to us if you have questions.
— Priscilla "Cilla" McKinley