Lance Alston

There is no question we’re living in a stressful time, whether it’s financial, medical or social.  Who could have possibly imagined on 1/1/2020 what our everyday life would look like today?

We all know that stress management requires physical activity and healthy eating.   Honestly, I’m giving it a try every day, but it’s not easy when you’re working long hours at home.  I tend to manage stress by looking for more information and data.  (I’m sure a psychologist would argue my approach is likely to induce more stress in the end.)  Nevertheless, I’ve been reading a lot of research lately on markets, recessions, monetary and fiscal policy, etc., and I’ve listed a few of my favorites below.  I’ll leave the medical information to qualified medical professionals, so you’ll find just the financial and economic topics here.

Tiffany and I are very aware that sending frequent emails with layers of data and information can be counterproductive.  However, these are unusual times and we are trying to find the right balance of communication and information.  Our primary mission is to make sure you and your family are mentally, medically, and emotionally healthy.

We are ready and available to help with your financial questions and concerns.  Please send us an email or give us a call if you need to talk.  Over the last two weeks, we have reviewed a handful of plans with clients and the results are consistent – the financial plans are still okay.  Your financial plan is probably changing daily as we go through this crisis.  People are rethinking their spending, travel plans, retirement dates, and everything else.   Remember, your financial plan can give you the context you won’t get from watching the global stock markets.

Tiffany and I can help you manage your financial stress and give you clear, data-driven answers to your financial planning questions.  You engaged us to create your financial plan for exactly this reason.

Please stay safe and healthy while the world adapts to this new challenge.

Lance and Tiffany

 

“An Update from Dimensional’s Co-CEOs on COVID-19 Response” – Dave Butler and Gerard O’Reilly discuss Dimensional’s trading infrastructure.

“The Corona Virus and Market Declines” – Dimensional Funds talks about how markets respond to uncertainty.

“Circuit Breakers and Dimensional’s Approach to Trading” – Dimensional Funds discusses recent volatility and market circuit breakers.

Social Insurance Proposal in Crisis – Greg Mankiw – Professor Mankiw offers his suggestions on how to offset the economic slowdown.  This is a consistently good blog.

Marginal Revolution Blog – by Tyler Cowen and Alex Tabarrok – My favorite economic blog.  It’s currently dominated by research, papers and discussions related to the current situation.

And here are a few charts for a longer-term perspective.  It’s important to remember, though, that there is no clarity on when the current pandemic will subside.  Trying to time the markets at this point, in particular, is a dangerous game.

1.  From Dimensional Fund Advisors –  Markets recover from market declines

Past performance is no guarantee of future results. Short term performance results should be considered in connection with longer term performance results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

 

2.  From Vanguard – from a market trough the 10-year projections actually improve.

Notes: Forecasts correspond to the 25th to 75th percentile of distributions of 10,000 Vanguard Capital Markets Model simulations for ten-year annualized nominal returns, in U.S. dollars, based on the MSCI US Broad Market Index.

IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of December 31, 2019, and March 12, 2020. Results from the model may vary with each use and over time. For more information, please see the important information below.

Source: Vanguard

Way back at the end of August everyone was worried about an impending recession and that dreaded inverted yield curve.  Well, we’re now mid-way through September and equity markets are up around the world for the month:

Index	9/1 to  9/16	YTD (9/16)
S&P 500	2.4%	19.6%
Japan Nikkei 225	6.2%	9.9%
HK Hang Seng	5.4%	5.0%
German DAX	3.7%	17.3%

The 30-year Treasury yield has also seen a huge run-up, to the point that the long end of the yield curve is no longer inverted.

Now that markets (and the media) have calmed down a bit, let’s take a quick look at the historical data on past recessions to see what we can expect.  Because we WILL see another recession…eventually.

Below is a simple chart showing every recession (as declared by the National Bureau of Economic Research, NBER) since 1950.  There have been 10 in the last 70 years.  Each orange bar represents the length of that respective recession in days.  Each green bar represents the time (in days again) between the end of that recession and the beginning of the next one.   Notice the relative size of each recession (orange) when compared to the following recover (green).

The gold line tracks the total return for a basic 60% Equity portfolio over each recession.  The time period I chose to calculate each recession’s total return begins 12 months prior to the start of a recession, and ends 6 months after the recession was declared over by the NBER.   I chose this timeframe because there is often a bull market rally as the recession is forming; going back 12 months from the recession’s beginning gives you a clearer picture by including those exceptional gains.  The same concept applies for the 6 months included in the total return following a recession’s end.  Markets tend to recover very quickly when economic activity picks up again.

Here are the takeaways from the last 70 years:

1. Recessions last about 11 months on average
2. Recoveries last slightly over 5 1/2 years on average
3. A simple 60/40 portfolio can withstand a recession –  historically they have been positive or slightly negative when measured over a reasonable time period encompassing each economic downturn since 1950.

Question:  Would you be willing to invest for the long-run based on this information?  If your answer is no, we should talk.   Because there is a recession in our future.

 

 

Disclosure page for blog

You probably noticed that US equity markets did not celebrate the Philadelphia Eagle’s Super Bowl win on Monday.  In fact, it was the worst one-day point drop in history for both the S&P 500 and the Dow Industrial Average.  (see #1 below)

We may be nearing that tipping point where the common discussion goes from “why can’t we have more stocks, I hate bonds” to “why do we own stocks at all”?  The short answer is that we own both, all of the time, because you just never know where markets are heading in the short-run. (see #2 below)

I must warn you the rest of this post will have almost nothing to do with economics, market predictions, historical trends, or recommended portfolio changes.  Nope, none.  Now is the time to focus on investor behavior, not markets.

Take a deep breath and repeat as needed – “even after Monday’s drop, the S&P is still up 10% since September and has almost doubled in the last 5 years.”   

Your portfolio is still okay.  Your financial plan is still okay.  Your retirement and future dreams are still okay.*  Are you okay?  (see #3 below)

Remember, you have stocks in your portfolio because they go up much faster than inflation in the long run.  You have bonds in your portfolio because people really, really hate to lose money, and they plan on spending some of that money in retirement.  Bonds don’t typically don’t lose money if they are high quality and short-term.  (For example, none of the taxable DFA bond funds lost value on Monday, while stocks were losing 4%.)

If you are concerned about the markets, give your advisor a call.  If you want to check in and get some reassurance, give your advisor a call.  If you want to know exactly how much you have invested in stocks…you get the idea.   

Tiffany and I have been talking about the coming market correction for quite a while.   We might be there, and yet, we might not.  1998 saw five down days greater than 3% for the S&P 500 and still gained more than 28% for the year.  In truth, no one knows where the market is heading in the short term. 

#1 –  Don’t confuse a point change with a percentage change.  Sure it was the worst point drop in history, but that’s because we are at ALL TIME HIGHS!  On a percentage basis, the market drop yesterday was not exceptional.  On average, we have had 2% declines in the S&P 500 every 37 trading days; 3% drops every 131 days; and 4% drops every 303 days – or slightly less than once each year since 1970.

#2 – Our expectations are often influenced by recent experiences, i.e. recency bias.  We forget stocks can go down while we’re in a bull market, and we “misremember” that they eventually can go up during a bear market.

#3 – Quick check up –  has your personal situation changed?  Is there any reason to believe your assumptions are unrealistic?  Do you have sufficient emergency cash and at least 5 years of portfolio withdrawals in bonds?  The natural tendency is to “do something” when markets correct.  A successful financial plan shouldn’t require a response to changing markets – those fluctuations are already assumed in your plan.  Doing nothing is your best option.

* I’m assuming you have a written financial plan that is up-to-date.  If you don’t, there’s no way to tell if your portfolio or your retirement are “okay”.  Now is probably a good time to give your financial world some attention. 

 

• Past performance does not predict future returns.  Always read the prospectus before investing.

Winter finally arrived recently in North Texas. Our high temperature today is expected to be 25 degrees, with a low in the mid-teens. We haven’t seen cold weather like this in 362 days!

My friends up north assure me you get used to the cold weather, but down here in Texas that can be challenging – our high temperature last year on January 2nd was 69 degrees. Just this morning my youngest daughter strolled downstairs wearing shorts and a t-shirt. I guess she hadn’t heard the howling wind or noticed the blue grey skies outside. It didn’t take long before she was back upstairs looking for her jeans and a sweater.

We knew this day was coming. It happens about this time every year. Fall’s end and winter’s beginning shouldn’t be a surprise to anyone. No one frets too much about the seasons and we all know exactly what to do when they change.

Why are we so adaptable when it comes to the changing seasons, yet terrified of the next bear market for stocks? Just like the seasons, bull and bear markets come and go. We cannot control them or predict the day to day market fluctuations any better than we can accurately predict the weather more than a few days in advance. Yet we know with a good deal of certainty that every soaring market must eventually fall. Risk and return are connected, remember.

We are now at 24 months and counting without a 10% market correction. Global markets have seen double digit growth, economic data seem encouraging and interest rates remain relatively low. This market feels like the warm, comfortable days of summer. And like every summer before the last one, it will end.

My advice is to treat the next bear market like you treat the changing seasons. Be prepared of course, but don’t be surprised or stressed by the change. A market correction of 10% is as normal as the annual fall foliage or January ice in North Texas. In fact, one survey suggests corrections occur every 357 days on average. That means we’re more than 12 months overdue.

Stay warm.