Let me begin by saying that I’ve never managed investment portfolios through the false prism of being right versus being wrong. Hindsight will always be perfect. To me, it is always about the discipline of risk management. This is especially true during a market crisis. This extraordinary moment in history has my full attention.
Over the last few weeks, I have been assessing and re-assessing the level of risk in my clients’ portfolios. Understandably, my process has tied closely to the news of the spread of the coronavirus and, most importantly, on its impact on our economy.
Remarkably, there have been only 21 trading days since the market high was reached on February 19th.
From Day 1 through Day 7, the stock market had suddenly dropped about 13% off its high. The business news headlines at the time were largely focused on the serious Chinese “supply chain” disruptions experienced by large international companies.
From Day 8 through Day 11, the market went sideways in very violent fashion. The focus over these days had begun to shift from business-related disruptions to the potential seriousness of our own looming public health crisis. It was at this moment that I wrote my first column addressing coronavirus and how investors might handle it. My advice on Day 11 could fairly be described as both conventional and prudent.
From Day 12 through Day 16, the fear of the profound economic impact of the public health measures we might face had begun to firmly set in. The mass cancellations of larger public gatherings began in earnest and the announcements of school closures hit the news. The stock market fell about 18% during this short period, bringing the total market decline to about 27%, as measured by the S&P 500 index of large companies. Smaller public companies who are more domestically focused began to fall even faster.
From Day 17 through Day 21, the forced closure of restaurants and bars, along with the voluntary actions taken by many others has now followed. So, too, has the start of massive employee layoffs. During this current phase, the market’s volatile up-and-down churn has added yet another 3% to the total decline. And, again, smaller company shares have fallen even faster still.
As I write this, the S&P 500 index is down about 29% and smaller company indexes are down about 39% from their all-time highs. The speed of the decline is unprecedented.
On the morning of Day 22, what I feel we know is this. The roiling closure of economic activity that we’ve experienced so far will undoubtedly increase. The fallout for small business owners and employees is profound. The federal government is searching for measures to lessen the blow. At this moment, their proposed solutions are insufficient. Their current inability to more closely match the speed, scope and scale of the economic crisis concerns me.
I am currently assuming the complete market trading timeline for this health crisis will run through Day 100 or early July. Every day now will add both valuable and worthless news to absorb. We are now standing on the edge of just Day 22. Over the next month, we’ll know a lot more. By that time, I feel the vast majority of the market’s losses will be in the books. I’m looking through the chaos to around trading Day 50 or so.
It is my current view the stock market has more room to fall. With the many uncertainties I see, along with the likelihood of worse to come for the economy, my current base case is for a cumulative stock market decline of around 45% to 50%. The decline in particular stocks will not be uniform. Given this, my focus is on how to best position and prepare for the recovery to come. As I wrote on the morning of Day 12, and now again on the morning of Day 22, I am still confident that this too shall pass.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all.