We are on the brink of a Bear Market | 3 Immediate Actions you Should Take

The S&P 500 is teetering on the brink of a Bear Market. What does this mean and where do we go from here?

The Chief Investment Officer of LPL Financial, Burt White, recently wrote “Pick your favorite narrative:

1. Stocks plummet 19% in just 2 weeks on global pandemic & oil collapse

2. Stocks start 2020 by giving back half of the S&P500’s ~30% gains from 2019

3. Stocks are up ~10% since start of 2019

All true as of 3/9/20… Choose the best story for you.”

While different narratives may try to help investors feel better and help them digest the current market volatility, the truth is that it is never easy as an investor to lose 20% of your stock investments especially over just 2–3 weeks. Many of my clients at Old Vine Capital and close friends have been reaching out to me this week to get my perspective and what to do moving forward.

The Simple Numbers:

11 years and 2 days after the longest running bull market in history that started on March 9th, 2009, the S&P 500 Index briefly fell today (3/11/20) more than 20% since its all-time high on February 19th, 2020. Another popular (non-market cap weighted) benchmark, the Dow Jones Industrial Average closed 20% below its all-time high entering official bear market territory. Driven by economic disruptions from COVID-19, the last three weeks have been marked by downside volatility not seen since the somewhat distant memory of 2008’s Global Financial Crisis.

A bear market by definition is a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. So where do we go from here and what should investors do during these emotionally trying periods?

3 Immediate Actions You Should Take:

1. Practice online “social distancing” from those friends with stock market tips on social media

·Everyone is quick to share their stories of doom and gloom online or even worse, their hottest stock picks to chase (or short), or most their ingenious options strategy (“I’m up 310% over the past week!) These same investors have likely been sitting on cash since selling out at bottom of the market in 2008 or they are the ones who will only tell you about their 1 or 2 great stock purchases (“I bought Tesla at $50!”) They somehow always omit they have annualized less than 1% returns across entire portfolio over the past decade, the 25 other stocks they bought that went out of business, or sadly how they lost their shirt trading options last year and will have to work another 8–10 years before they can retire at 78. Avoid these pitfalls at all costs.

2. Harvest tax-losses and rebalance equities to benchmark weight

·In your taxable (non-IRA) accounts, market pullbacks are a great opportunity to sell stock positions that have loss money since purchased and use those capital losses to offset income tax (if held less than a year) or long-term capital gains (if held longer than a year.) When selling negative stocks to harvest a loss, you should immediately re-allocate the capital back into the market and use it as a chance to rebalance your entire portfolio back to benchmark weights.

3. Stay invested and do not panic

· As outlined below, myself and industry experts agree that we will continue to see volatility ahead in 2020. However, you cannot time when markets will sharply rebound and thus should remain invested at benchmark weight. At Old Vine Capital, we currently like portfolio tilts towards US Equities and exposure to Quality and Minimum Volatility factors. BlackRock, JP Morgan, and Goldman all expect a sharp and quick recovery as COVID-19 disruptions dissipate. This recovery is what you cannot time and you do not want to miss out on (like many of the financial pundits on Facebook.)

Timely Investment Insights from the Top Firms in Asset Management:

BlackRock Investment Institute

“The coronavirus outbreak has continued to roil markets, even as significant monetary policy steps have been taken. Uncertainties related to the outbreak give public health officials a strong incentive to act aggressively to mitigate its human toll. These measures, though temporary in nature, slow economic activity, sometimes precipitously. We believe this will eventually set the scene for a strong rebound, but a decisive policy response is needed to safeguard fundamentals.

The coronavirus shock is similar to shocks caused by natural disasters in the sense that their impact on economic activity tends to be temporary. We see a sharp economic rebound once potential disruptions dissipate, and expect the global economic expansion to remain intact — albeit on a lower trajectory.”

JPMorgan’s Chief Global Strategist, Dr. David Kelly

“For investors, it is important to maintain a balanced perspective on all of this. While the headlines on the virus are scary, the truth is that equity markets have already seen a substantial correction. Long-term interest rates have fallen to levels that would seem to justify a balanced asset allocation, even in a recession. In addition, market moves so far this year, have already moved portfolios to a more conservative stance. A synthetic portfolio that was allocated 60% to the S&P 500 stock index and 40% to the Barclay’s Aggregate bond index at the start of the year, would, as of Friday, have been 57% stocks, 43% bonds and market moves this week could further tilt the portfolio away from equities.

Finally, many of the valuation anomalies, such as the relative cheapness of international stocks relative to their U.S. counterparts, have persisted into the equity market slide. For investors, while a more conservative approach seems appropriate in a time of heightened uncertainty, it is also important to keep an eye on opportunities as the economy and markets move from a potential recession to an inevitable recovery.”

Goldman Sachs Chief US Equities Strategist, David Kostin

“The chief strategist for U.S. equities at Goldman Sachs Group Inc. <David Kostin> cut his year-end forecast for the S&P 500 while trimming his profit estimates for a second time in a month. Earnings will drop at least 12% in each of the next two quarters as plunging oil prices and the spread of the coronavirus hurt businesses, he said.

With profits poised to collapse and sentiment to worsen, Kostin now expects the benchmark index to drop to 2,450 by the middle of 2020. That represents a 15% decline from the last close and a 28% slump from its February peak, a loss that if materialized would mean equities enter a bear market.

“We believe the S&P 500 bull-market will soon end,” Kostin wrote in a note to clients. “The deterioration in fundamentals is visible.”

Goldman Sachs Global Investment Research

But investors shouldn’t give up on stocks yet, the strategist suggested. Things will get better in the second half as the negative impact of the virus wanes and profits rebound, he said. While reducing his year-end target for the S&P 500 by 200 points to 3,200, Kostin still sees gains equaling to 11% from Tuesday’s close.

A new bull market will likely be born later this year,” he wrote.”

Putting Everything into Perspective:

Despite fear and volatility plaguing capital markets over the past few weeks, keep in perspective that like a rodeo cowboy, we just rode a bull for over 11 years straight. For investors that remained prudently invested since the depths of the last bear, their portfolios are still sitting on handsome gains — about 15% annualized per year. Investors who even waited a year and re-invested in 2010 are also doing just fine.

However, investors who made decisions based on fear and emotions likely sold out of their stocks during 2008/2009 and sat on the sidelines in cash for years missing out on the best decade of equity returns they may see in their lifetime. There are entire textbooks dedicated to the Psychology of Investing that outlines why so many individual investors drastically underperform the market over the long-term. Don’t fall into those traps. Be smart. Be calm. Stay the course. Stay focused on the long-term.

At Old Vine Capital, our investment philosophy is “Focus on what you can control. You cannot control daily market volatility, you cannot control geopolitical events or macro-economics, but you can control your future by building an effective financial plan, prudently saving, and investing wisely.”

Focus on what you can control.

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Neil Kay

Investor, Traveler, Fundraiser, Dog Whisperer, Husband, Father. Managing Partner of Old Vine Capital, a private investment advisory firm based in Austin.