A Message from ZLC Wealth: Don’t Panic.
The following article has been reposted from ZLC Financial affiliate ZLC Wealth Inc. ZLC Wealth’s Portfolio Managers’ are here to serve our clients and provide guidance and peace of mind as we navigate these trying times. If there ever was a time to reflect on risk, and financial impact of risk, our ZLC team is here to help. Please stay healthy, safe and reach out to your ZLC Advisor, or any member of our team, should you need anything at all.
With the investment world experiencing a period of unusual volatility and the greater world dealing with a significant viral threat, we understand that many of our clients are looking for guidance. Please know that ZLC Wealth is closely monitoring all developments, but, like everyone else in this business, we can’t tell you where the market will be tomorrow or the next day. And we don’t think this should be a concern. What we can do is what we have always done – take a long-term view, have reasonable diversification across strategies and holdings, pick and monitor good managers, oversee and rebalance portfolios, and stay rational not emotional. In the long term, we think these principles drive the best returns.
Over the last 50 years, we’ve seen Black Monday when the US markets crashed by 20% in a single day, the collapse of the tech bubble in 2000, and the Great Financial crisis of 2008. During each of these time periods, it was important for investors to stick with their plan, not react to the news or short-term market moves.
The Dow Jones Industrial Average hit an all-time high of 29,551 on February 12, 2020. On March 9, it was down to 23,851, a drop of 19.3%. What happened? There are two key causes.
First, markets began to fear the corona virus could do real harm to the North American economy. The disease started in late 2019 in the city of Wuhan, where people were originally treated for pneumonia from an unknown source. On January 11, the first death was attributed to the new disease and on January 23; China imposes aggressive containment measures in Wuhan. To this point, the market was able to downplay the potential effect on the North American economy.
On February 11, the disease was officially named COVID-19 and on February 26 we saw the first case of transmission in North America. The daily updates pointed to more and more concern for the North American economy. Italy is now on lockdown and on Sunday the BNP Paribas Open in Indian Wells, California was cancelled. Is a postponement of the Olympics next? Be ready for more initiatives that will hinder commerce, but also look for signs that the virus begins to taper. The self-imposed quarantine that China has implemented has been working, and we’ve seen new cases of the virus retreat. Tapering, when it does happen, will lead to growth.
The second issue was that Russia decided not to support Saudi Arabia in controlling oil exports causing the price of oil to drop 30% on March 9. Russia is unhappy that OPEC plus Russia, often called OPEC +, were restricting their oil exports while US shale producers kept increasing production. The price of oil had already been dropping based on fears of a slowing Chinese economy, but with Russia and Saudi Arabia flooding the market, prices crashed. In our view, these oil prices are not sustainable as much of the world’s production costs more than the current price. The best solution for low oil prices is low oil prices. Production will eventually be cut in high-cost areas and output will decline resulting in a stabilization of prices.
The spread of COVID-19 and crashing oil prices caused traders to sell off equities. Money moved to government bonds, especially US treasuries. The US 10-year treasuries that had yielded 3.24% in late 2018, dropped to a record low 0.50%.
We’ve been through this before, and it won’t be the last time. To put this in perspective, on October 16, 2008, in the heart of the great recession and one month after Lehman Brothers filed for bankruptcy protection, Warren Buffet wrote an opinion piece in the New York Times titled “Buy American. I am.” Markets at the time were in a tailspin and the economy was faltering when Buffet wrote:
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Buffet’s message was early – the market dropped significantly after he wrote this piece, bottoming out on March 9, 2009 – but the message was right. Stay invested. Keep to your plan. Markets are up significantly since 2009 however; we can all remember how scary things were during that time. You may think that we in the investment world reference Buffet too often, but keep in mind he has proven over many years to be one of the best long-term investors and his approach is similar to ours – long-term value investing. We can’t think of a better inspiration.
DON’T PANIC. STAY WITH YOUR PLAN.
Article reposted from ZLC Wealth’s March 13th, 2020 Special President’s Letter.
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