I usually wrap up these posts by asking that you reach out if you have any questions or want to talk. Today I want to lead with that. We’ve heard from many of you recently, and we’ve truly enjoyed our conversations. To say the last few weeks have been an interesting time in markets and our lives might be the understatement of the year, but we mean it when we say we look forward to hearing from you.
We try to be pro-active in communicating with you through this medium as well as individualized calls or emails, but if something is on your mind, we want to hear from you. It can be easy for us to get wrapped up in spreadsheets and data, but conversations get us through difficult times.
The amount of information being communicated about the new coronavirus, economies, markets, and what governments might or might not do is staggering. Understandably, it’s been difficult. Markets have whipsawed up or down daily in magnitudes we haven’t seen in years or decades.
You might be struggling to make heads or tails out of all this information and what it means to you and your family. Markets are doing the same thing – receiving and digesting information and trying to discern its impact on price and value.
Believe it or not, there are a lot of parallels between how we as individuals process new information and incorporate it into our lives and how the market incorporates new information into prices. Early in the process of receiving new information, the range of potential outcomes is very wide and leads to a high degree of uncertainty. The earlier we are in the process, the harder it is to refute or disprove the various extreme outcomes. This is one of the reasons we see markets driven by hope one day and panic the next.
Think of it this way. You’re now forced to work from home. The number of questions around how that might work for you, your family and your employer are mind-boggling. Your anxiety around juggling these new variables might increase. A week into it, maybe you’ve solved for three of those uncertainties, but four new ones have cropped up. A month into it, you’ve solved for five more, but now only two new ones have come up.
Suddenly, progress has been made, the range of potential outcomes has narrowed and the uncertainty about the future has decreased. You can see a path forward of productive work and family management. You might even start to think that working from home isn’t so bad. “Maybe I’ll ask the boss if I can do this permanently?” you ask yourself. Then the next distraction hits and you long for the tranquility of the office. But, this distraction doesn’t impact you the way they did the first week because you now know that you can slip back into your new routine.
Markets are going through the same process.
Have we had bear markets before? Yes.
Have we had recessions before? Yes.
Have we had either of those that were caused by a global viral-induced pandemic? Not in modern markets. Sure, we’ve had a Global Financial Crisis, 9/11, the crash of 1987, rampant inflation, World Wars, and the list goes on.
Now we have a new type of uncertainty for markets with a very large and unknown set of potential outcomes. But, guess what, even though all of those were eventually solved, no one knew what to make of them in their early days either.
The natural response for markets is that the more uncertain the potential outcome or the timing of an outcome, the more the approach becomes sell now and ask questions later. This is likely the stage that markets are in now, which is similar to that first week of your new work from home environment, where you had no routine and every distraction felt like the end of productivity.
While on any given day it might seem like markets are reacting to the news of the day, what they are actually doing is taking that news and extrapolating it into the future. With a wide range of potential outcomes and markets being driven by fear, the most negative potential outcomes are the ones that get extrapolated into the future.
There will come a time when, even though the news of the day isn’t great, it’s not as bad as past news and its impact on the future is a little less uncertain. The range of outcomes narrows. And, like you got used to the inconveniences of working from home, the market starts to see a path forward – a path where things like company earnings and cash flow start to make sense again and can be used to rationally value stocks.
Even after the path forward is identified, there will certainly be more bumps along the road. Some might even feel like the next “big one”, but the market will have refocused on earnings returning to growth mode rather than on how far they might fall. Regardless of the cause of past recessions and bear markets, this is what has eventually happened near the end of them all. Patience, faith in markets, and a dose of confidence in your plan will help you get through this.
We often bring financial topics back to things that we can control – how much we save, how we allocate and diversify our portfolios, minimizing the cost of the investments we own, etc. We do this because they are in fact shown to be primary drivers of successful financial outcomes. The trouble, though, is that those are all easy to do in normal markets, and, quite frankly, not too difficult even in highly uncertain markets.
The thing that we can control that becomes exponentially more difficult as markets become more uncertain is how we behave in the face of uncertainty. I know it might not feel like this right now, but stock prices will recover and even reach new highs again. I don’t know when it will happen, but odds are it will be when we least expect it. It’s one thing to trust this intuitively, but it’s much more difficult to actually follow through with this trust and remain invested in the face of declining and volatile stock prices. (see here and here for recent discussions on how this is incorporated into your plan)
Many of our lives and routines have been temporarily altered with little notice and time to plan. How we handle that uncertainty can also carry over into how we view other aspects of our lives, such as our investment portfolio. I’m sure many of us feel a little isolated right now and are wondering how long this might last. On top of that, we’re unable to participate in normal activities or spend time with friends and family.
The good news is we do have the ability to control some of our actions in this regard, too. Here are three things that I plan to do:
Stay safe, stay steady, and thanks for reading. I’m going to go call my grandparents.
Editor’s note from Jonathan: Matt did in fact follow his own advice and called his grandparents after he finished writing this.