Coronavirus: Another Black Swan
Over the past few weeks financial markets have experienced swings that we have not seen in decades due to the uncertainty created by the spread of the coronavirus. While the market has been through far more harrowing times throughout history, and especially over the past 20 years, the unpredictability of the virus and the efforts to contain it have markets confused.
It is too soon to determine how the coronavirus will impact corporate earnings since it is affecting both the supply and demand side of the economy. For instance, Apple warned that March revenue would be down because of delays in shipments on components that are made in China. Of course, a three-week delay won’t deter someone from getting a new iPhone. Eventually that phone will be bought. That’s a supply issue. A demand issue, on the other hand, could be more damaging. Take for example the many large corporate conferences that have been cancelled. Along with those cancellations come empty hotel rooms and cancelled airfares – revenues that will never be made up.
Though market corrections are a normal part of investing - on average, the S&P 500 falls 10% or more once a year, and 20% or more once every six years – the speed of the correction has surprised many. The old Wall Street adage that stocks “take the stairs up and the elevator down” surely rings true today.
Although unwelcome, a bear market (a decline of 20% or more) was long overdue after a decade of calm. As in the past, today’s bear market was caused by yet another “Black Swan Event”, which are events that are unexpected. Just as the attacks on 9/11 were a Black Swan, so too is a virus that is keeping millions across the globe from leaving their homes and stalling the economy. Like The Crash of ’87, 9/11 and the Financial Crisis we believe that this too will be viewed in hindsight as yet another temporary setback for investors.
Morningstar has called the sell-off a “gross overreaction” and perhaps in hindsight this will prove true. Markets have overreacted to Black Swan events in the past and will likely do so in the future. To put the volatility that we face today into perspective, let’s revisit three events that were “once in a lifetime” happenings and see how long-term investors fared…
October 19, 1987 – Black Monday
The crash of ’87 still remains as the biggest one-day percentage drop in the Dow. A 20% fall – in one day. A $100,000 investment made in the S&P 500 right before the crash would have dropped below $70,000 in less than two months. A year later, things were back to even. Five years later, that same $100,000 would have grown to $170,000, and after 10 years the money more than quadrupled to $440,000.
September 11, 2001
The attacks of 9/11 took place early that Tuesday morning. Financial markets never opened that day and were shut down completely until Monday September 17, when they reopened under the protection of armed guards. A $100,000 investment made the day before the attacks fell to below $73,000 over the course of the following 12 months. By November 2003, the losses would have been recovered and would have grown to nearly $130,000 five years after that terrifying morning.
September 15, 2008 – Lehman Bankruptcy
It was only 12 years ago that the we experienced the worst financial crises since the Great Depression. The world’s largest financial institutions were brought to their knees by overzealous lending, complex financial instruments and overleverage. A $100,000 investment in the S&P 500 made right before Lehman declared bankruptcy would have plummeted to less than $55,000 within 6 months. About 18 months later the losses were recouped, and 5 years later that $100,000 investment would have grown to $150,000. If left untouched for 10 years, the same $100,000 that plummeted to $55,000 would have grown to $285,000.
Yes, the coronavirus is different than these events, both economically and from public health perspective. But, consider that the terrorist attacks of 9/11 came during a recession, whereas the coronavirus has arrived during a time of historic economic strength in the U.S. Yes, unemployment is sure to rise, but as of February it was at a 50-year low of 3.5%. Things changed after 9/11, and things will change now too. Remember how easy it was to walk into an office building in NYC before the attacks? No more. Now, most building visitors are ID’d and photographed. Businesses adapted, as they always have. Maybe as a result of this pandemic less people will die from the flu (which kills as many as 56,000 people each year in the U.S.) due to increased hygiene awareness. Business and society will evolve one way or another.
We here at NFN know that our investment strategies, which are customized to each person’s individual circumstances, have never assumed that the market only rises. Black Swans are real – we get that. Investments such as mutual funds and ETF’s provide broad diversification so that our clients are not over exposed to one area of the economy – like cruise ships and airlines. Most individuals who have short term goals will have an allocation to bonds – which have held steady. And, many financial plans are constructed using insurance products with guarantees – like annuities and guaranteed cash value life insurance. Times like this offer long term investors opportunities. Those reading this letter who were working with us during 2008 or on 9/11 likely thanked themselves after for not panicking and “sticking to the plan”, as most did. For those who started with us after 2008, don’t be surprised if in 10 years the “coronavirus crisis of 2020” is being used as yet another example of staying the course during difficult times since we know another Black Swan will follow.
Written by Robert C. Votruba, Ph.D., Director of Investments, National Financial Network LLC. Registered Principal and Financial Advisor of Park Avenue Securities LLC (PAS), 990 Stewart Avenue, Suite 200. Garden City, NY 11530. Securities products and advisory services are offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is a direct, wholly owned subsidiary of Guardian. National Financial Network LLC is not an affiliate or subsidiary of PAS or Guardian.
Opinions expressed herein are not necessarily those of Guardian or Park Avenue Securities. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security.
Data Source: FactSet
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Sources: Wall Street Journal, Barron’s, Commerce Department, Bloomberg, Federal Reserve, Fortune, JP Morgan, National Bureau of Economics.
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