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Unprecedented times call for unprecedented patience

April 15, 2020

It has been quite the roller coaster in the stock market through these unprecedented times.  The stock market retreated 35.4% in all from its recent all-time high on February 19th 2020, and has since risen 29.89% off of the March 23rd lows (as marked by the S & P 500).  This might lead one to believe that we are only off about 5.5% overall if you looked at your portfolio value (35.5 minus 30); however, upon further review you’d see this to be untrue.  Let me explain briefly:

“Hypothetical $100 account loses 50% of its value.  

$100 goes to $50

After losing 50% of its value, the stock turns around and gains back 50% of its value. 

$50 goes to $75

After losing 50% and then regaining 50% the account is still off $25 from its original $100 investment. This is still a 25% reduction in value from the original amount.”

The simplified answer to this is that a large gain on a smaller dollar amount is not the same as a large loss on a large dollar amount.

Therefore, as we access the current presumed economic recession, we are still down about 16.12% from the recent highs which would take a percentage gain of 19.23% from current levels to make it back to even. 

While we still have a long road ahead to regain the economic growth status of the world pre-Covid19 virus, the same story of being patient and riding this wave of volatility applies.  For example, since our blog on March 9th about despondency and fear, the patient investor would already be up roughly 3.9% on their portfolio value since that day.  In other words, those who let the emotions of fear force them out of the market are in a worse off position than those who remained calm and held throughout this downturn.  

What do we expect from here?  In short we expect more volatility, meaning more large up days and more large down days.  Since we have retraced about 30% off of the lows, we would not be surprised for the market to soften a bit at this point.  When we look at some technical indicators, it would make sense for some rebalancing and profit taking to occur as the S & P 500 approaches the 50 day moving average from below.  The 50 day moving average historically is an inflection point for the index, and recently the 50 day crossed below the (slower moving) 200 day moving average in a technically bearish manner for the first time since December of 2018.  That number is currently 2882 on the S & P 500.

We also expect the economic numbers to slowly be released, stating the pain of this recession that we know we are in: retail sales for the month of March were off 8.7% year over year, manufacturing production for March declined 6.3% month over month, and the March unemployment rate increased by .9% month over month.  Most of these numbers are the largest losses on record in the past quarter or half century. Yes, CENTURY.  While these numbers are expected, the market has now turned its eyes forward to pricing when will the economy reopen for business.  

Trump along with several state’s governors have discussed plans to reopen the economy as soon as May 1st in some fashion, and many believe that the market has already priced in a ‘best-case scenario’ for this reopening.  Citi banks CIO was quoted saying ‘the market has priced in a very enthusiastic outlook for the reopening’ and that he believes it is pricing in a vaccine sooner, rather than later. So, we’d caution of being too optimistic here as well as too pessimistic.  The truth often lies somewhere between the two extremes.

More importantly, we encourage you all to stay smart with accordance to social distancing guidelines and pray that you all remain healthy as we trudge through these unprecedented times.