One of the most haunting stories I have read is the 1974 book “Survive,” about a Uruguayan rugby team whose plane crashed in the Andes mountains. There were 45 people on the flight, and only 16 survived the initial crash. The search was called off because sub-zero conditions endangered the rescue workers.
I remember a scene in which the survivors constructed a make-shift wall of suitcases in the back of the broken fuselage to protect themselves from the elements. They were at least out of immediate danger of freezing to death. Then a mighty avalanche buried them. Years later I heard one of the survivors interviewed and he said the lesson was this: “Never think that things can’t get worse. Because they can.”
The psychological impact of the Covid-19 virus is immense. By now, the novelty of being at home is wearing off. We are tired of cooking and have completed our home improvement chores. However, we are hearing promising news from New York City, where Governor Cuomo is talking about a plateau in the number of cases. What’s more, the stock market had a powerful rally on Monday. There is hope, and we are all beginning to think of better times ahead.
Nevertheless, we should be prepared for what still lies ahead and maintain awareness of the context in which we are making decisions about our investments.
We need to think about the progression of the virus and the progression of the markets on separate trajectories and time frames.
Our base case in the U.S. continues to be that we are doing nearly everything we can to slow the spread of the virus but not enough to stop it. It is reasonable to believe that the virus and resulting crisis is going to be with us for months. When our social distancing guidelines are eased things still won’t be the same. Only when a vaccine is developed and we have widespread inoculation will “normalcy” return. Most reliable sources predict that this will be at least a year from now.
The markets will not be on a parallel track with the virus because markets are forward indicators.
For instance, the markets dropped before the number of Covid-19 cases rose significantly. This will continue; markets may look forward six months to a year and react accordingly. I remember in 2007-2008 when people called the market bottom in November of 2007 and it subsequently recovered by 20 percent. It then went back down and finally bottomed out in 2008.
The people who jumped in November of 2007 got suckered in too quick. Then when the market recovered they missed out. It’s a basic tenet of investing: when people invest and the market drops, they feel like they made a mistake and are regretful, thinking “Darn it, I knew I should have waited.”
I wish I knew exactly what the market was going to do over the next year.
There is of course a chance that the market has bottomed. However, if it hasn’t bottomed our opinion at FourThought Private Wealth is that the downside risk is limited based on current valuations and the likely duration of the health crisis.
The process we are following at FourThought is to buy stock and invest most of the money in our portfolios intended for the longer term now. Then, we will selectively invest the remainder over the next month. When the markets turn (and they may have already turned), they may surprise us on the upside.
Be prepared for the doldrums, because things can still get worse. Preparation means not letting that affect your long-term investment strategy. Use this opportunity to position yourself for the next five years. Together, we can survive and thrive!
A Note From the FourThought Team:
Markets are volatile now and many investors have lost value. If you feel your risk tolerance has changed and want that reflected in your investment strategy, or you want to move to a more conservative strategy, please call us to discuss.