Since 1925, there have been 14 major market crashes where the US Dow Jones Index has experienced a drop of more than 20%.
These major market corrections are usually caused by one of three things; structural breakdowns in the economic system, cyclical changes caused by economic factors such as inflation, interest rates, and overvaluations, and finally, event-driven circumstances like 9/11 and Covid-19. I would argue that the current market correction we are experiencing is mostly the result of an event-driven circumstance, but the markets we’re operating in “extra innings of the game” as we’ve pointed out, so this correction is likely a combination of both cyclical changes and the impacts of Covid-19.
You might find the chart below helpful in understanding the history of event-driven market corrections. They are usually less severe than other crashes and shorter in duration. Historically, cyclical corrections have been much longer.
With that said, over the past week, we have seen some significant swings in all markets. During the first four days of the week, the market was back up 14%! Equity portfolios are down overall, but far less than a week ago. We are in a secure position with significant short-term cash in your portfolios. We have significant ballast to weather most storms over the coming weeks.
As expected, fixed income markets went into disarray this week and it appeared markets were becoming locked down. Although investors are rarely exposed to the fixed income markets, they are far larger than the stock market and very important for the functioning of the daily economy. There will be some bankruptcies and major credit downgrades coming so we have started to build a moat around the fixed income assets in your portfolio. We’ve elected for a “return of capital vs. return on capital” strategy in this stressful period.
We have begun to review all portfolios for tax-loss selling opportunities. As a part of this process, we can trigger losses that can be used by clients against tax in prior years or future capital gains. In other words, we bank losses that will be used to shelter taxes later. It’s a smart strategy to implement where possible. Our ability to leverage tax-loss selling opportunities is client dependent, and we began this review on Wednesday. The strategy is conservative, doesn’t affect the investments or asset allocations of portfolios and pays dividends in the future by reducing taxes.
Everyone is learning new insights into current markets and how they react with algorithmic and quantitative driven model portfolios. There is a significant amount of artificial intelligence (AI) in structured portfolios that have resulted in huge machine-driven sell-offs and rallies, as experienced this past week. Since 2008/09, market volatility has been an investable asset class for pro-traders. AI funds and pros were on full display over the past 2 weeks. Markets like these are hard to comprehend at times and can be quite unnerving for investors. The key is not to panic and let us and the portfolio managers do our work. A lot of financial planning and investment work has been done for clients. Success is never a straight line to the top.
In our last email, we set a target date for a reopening of the economy at May 15. Further information leads me to believe this is still about right. Some parts of the economy will take much longer, and other parts may never reopen. Fear is the greatest obstacle going forward. It’s important to note that although people aren’t moving globally, many goods are. The world is operating, albeit slowly.
Not to be a broken record but, it’s worth repeating; “You can’t fix your roof during a hurricane”. Preplanning is essential. Many clients have experienced a “flooded basement” through this latest storm but, rarely does a flooded basement cause one to take up stakes and move. We assess the damage, fix the infrastructure and secure ourselves for the future.
It’s a worldwide issue and we will all have to play our part in the recovery.
Our Stonegate staff is all hands-on deck right now even though we are working from home. We are here and available to you.
Rob & Mike