In our last market update (sent not very long ago it seems), we suggested that forecasting tends to be a terrible business. It seems we were right. While Coronavirus was just beginning to make an impact in China, it was unknown how it would advance or not. While the virus has arrived in multiple countries since then, the impact is still quite uncertain. This uncertainty has led to the poor performance of the stock markets of the last week.
Through market drops such as this, context is essential, as paying attention to both traditional media and newly minted experts on social media, could cause panic attacks. As of the markets closing last night (Feb. 27th), U.S. equities stand ~12% below their all-time high, reached Feb. 19th which brings the index back to its mid-October 2019 level. Yes, we have only dropped back to where the markets were in October. The stock markets had increased significantly since then, with great performance through the month of January into February.
It should not be forgotten that it is in the very nature of stock markets to experience bouts of heightened volatility and fear at times of uncertainty. For instance, since 1990, the U.S. stock market has experienced an average annual correction of ~13% despite finishing higher 24 out of 29 years by an average of +11%. The last time we have experienced this type of volatility was the last quarter of 2018 where markets fell up to 20% in 3 months. Indeed, these simple statistics illustrate that letting emotions take over and selling in times of heightened uncertainty is generally the best way to ensure heavy losses, as this strategy often rhymes with selling low and missing the rebound.
So, yes, significant drops in the markets are normal, but how does this impact your portfolio currently? Depending on your personal risk tolerance and those that are in our customized managed portfolios, your year-to-date returns for 2020 (through Feb. 27th) would be between -0.68% for our Conservative portfolio to -2% for our Maximum Growth portfolios. A far cry from the numbers you may hear reported in the media, demonstrating the value of a disciplined, diversified investment process.
All this having been said, we do not take the situation lightly. The emergence of additional Covid-19 cases outside of China materially increases uncertainty for global growth and, consequently, clouds the near-term outlook for equity markets. As such, the next few weeks are likely to remain abnormally volatile as markets adjust to the first series of post-coronavirus economic data – which will undeniably be weak – together with the extent of the contagion.
As we ended our last market update, to mitigate uncertainty such as we are experiencing now, we diversify your portfolio across many different asset classes and countries. A diversified investor will never have the “best” performing portfolio or even the hottest market sectors. Being diversified means that some investments perform worse than others. While the equity markets have suffered, our fixed income portion of portfolios have held up well, doing what they were designed to do.
We continue to adhere to our core investment principles of thinking long-term, preserving your capital through personalized risk management and maintaining a disciplined process through diversification.
Please remember we are always here for you.