Some thoughts regarding the financial markets

Let us first apologize in advance for the rambling nature of this column.

However, fellow investors must certainly have some sympathy. It has been a long, historic week and one that will not soon be forgotten. To put it into context, consider the fact that through Thursday, a day in which the S&P 500 suffered its worst one-day percentage decline (9.51%) since the crash in October 1987, stocks had fallen 16.54% for the week and 26.74% from its record closing high set just 18 trading days ago, Feb. 19.

The catalyst for this rapid decline was two black swan events (unpredictable event with outsized consequences), namely the contagion of the coronavirus and the collapse of oil prices. Some thoughts, albeit rambling on where we are today and where we might be going.

This is not another 2008. The banks have pristine balance sheets. Americans are saving nearly 8% of their pay. Household debt as a percent of income is at multi-decade lows. Unemployment is at multi-decade lows. Heck, there are more jobs available than there are individuals to fill them. The housing sector is rock solid and inventories are low.

This is not a Fed induced economic slowdown. It is a crisis in health care that doesn’t need to have long-term economic repercussions. The timeframe over which this crisis will pass is unknown. However, most economists think between three to six months or sooner if the powers that be can begin to test those potentially afflicted with the coronavirus in adequate numbers and then respond appropriately in order to begin to bend the curve.

Rest assured, both the Democrats and Republicans will ride in like the cavalry. Think about it. This is an event that doesn’t require bailing out of Wall Street or big banks. It is one where the health of Americans, yes American voters is at stake. It is also an election year. If that doesn’t prompt both Nancy Pelosi and President Trump to get their respective butts in gear and pass a comprehensive spending package to help those in need, nothing will.

All investors tend to compare the current value of their portfolios from its peak. This is a mistake. For example, when you wake up every day do you compare it to the best day of your life? Of course not. If so, you would be in for daily disappointment and at times suffocating.

Compare the value of your portfolio today to its value one, three, five and 10 years ago. This will provide perspective.

There is no longer any barrier to making trades in your investment account. Today, you can do it over your telephone, iPad, or laptop in an instant. Furthermore, there are no trading costs on most platforms. What a deal. In an instant you can change your entire portfolio at no cost. The result is that many unskilled, inexperienced investors have taken the reigns of their financial future.

That said, we have often noted that if capable, managing your own portfolio is certainly an option.

Why do all investors talk about buying low and selling high and yet when they have the opportunity they run for the hills?

Let’s assume, which is our baseline case, that economic activity over the next two quarters will be severely restricted due to the coronavirus. In fact, the economy will most likely contract. Keep in mind that the financial markets are a discounting mechanism. That is, at some point in time they have looked past the current economic environment. Usually it is forward looking six to nine months.

A case in point is that during the “Great Recession,” as measured by Gross Domestic Product (GDP), the economy contracted the most during the 2nd (-3.06%) and 3rd (-2.80%) quarters of 2009. However, the stock market bottomed on March 9, 2009 and then rose by 56.09% through the end of September, the quarter in which as noted above the economy contracted by 2.80%!

By the time things were “looking up” for the average American, the stock market had already risen considerably. The question for today, is have we discounted the vast majority of this pending economic slowdown. We think most likely.

Finally, there will be a recession. However, if handled aggressively by our Health Care Providers, the Trump Administration, Federal Reserve, Treasury Department, Congress as well as State and local municipalities it does not have to be long lasting.

We are optimistic. However, expect the choppiness and volatility to continue until this virus can be contained.

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.