Pandemics & Portfolios: Fear & Facts

We understand that market volatility, and uncertainty with the response to the Coronavirus (COVID-19) can be unsettling. We want to remind you that we are here for you, your family and your friends. Part of this is to provide resources to help you feel ready and safe in the days, weeks and months ahead. We will continue to provide resources via the internet, including our Coronavirus Covid-19 Resources Page and Recording of the March 12th Don Connelly event. As always, please reach out to us with any questions, concerns or if we can otherwise be of service.

There is a lot of information, and misinformation, floating around regarding the Coronavirus, the broad markets, and the economic outlook. This is a rapidly evolving situation. As always, we are here for you and your family and are happy to answer any questions and address any concerns.

Below we review some of the main questions people are asking us. Before we get into the details, our team wants to thank everyone for their kind words of support and well wishes. 

Carver Financial Services, Inc. has been in business for 30 years and has weathered many storms by keeping our focus on the well-being of our clients, our team and our community. Our firm was founded with the vision of making lives better. One of the primary ways we do that is living by the mantra of Always Be Prepared—whether in our planning, our training or our mindset. In light of the recent developments around Coronavirus, the necessity for preparedness is clear. We are doing everything possible to provide information to help you feel ready and safe in the days, weeks and months ahead.

We will continue to reach out to you for your regular reviews. These may be done in person, or if you prefer not to come in person, we can do reviews via Skype, Zoom or phone. We are closely following all guidelines and recommendations laid forth by the Center for Disease Control (CDC), the World Health Organization (WHO) and other national and local government organizations to protect our employees and those who visit our office.

Our Personal Vision Planning® process includes holding cash for near-term needs. While this can lead to a portfolio underperforming the index when things go straight up, it can help lower volatility when things go down. We believe the current market environment is offering smart investors three potential opportunities to benefit, which we discuss below.

The Stock Market Is Up More Often than It Is Down

The volatility we are seeing is not unexpected, although the speed at which it has happened is. This is why we have worked with you to have fixed income and cash available to help balance your portfolio. Our Personal Vision Planning process takes into account market and portfolio corrections like the one we are experiencing now—even though we understand that the drop in values may be unsettling.

A market correction is often defined as a 10 percent pullback from a recent peak. A bear market is a period when the market falls by 20 percent or more. Yet a correction doesn’t necessarily mean a bear market is imminent. In fact, history shows us that selloffs are nothing out of the norm. Data from the Schwab Center for Financial Research show that there have been 22 market corrections since 1974, and only four of them—occurring in 1980, 1987, 2000 and 2007—eventually ended up as bear markets.

How the Current Volatility Compares to Past Situations

The recent market volatility is attributed to concern about the Coronavirus. Although we don’t know what the human or financial impact will be at this point, we can look at other recent epidemics and the longer-term impact they have had.

The 2009–10 flu pandemic, or Swine Flu, began on March 17, 2009, in Mexico. At that time, the United States was emerging from the 2008 financial crisis. The virus peaked in this country in October 2009, before officially ending on August 11, 2010. From the start of the virus to its finish, the Dow had risen more than 40 percent (First Trust chart).

March 9, 2020, was the eleventh anniversary of the crescendo of global panic that marked the bottom of the bear market of 2007–09. There are, however, stark differences between 2008–2009 and now. In 2008, there were serious challenges to our economy with the sub-prime loan crisis. Today the economy is showing some of the best numbers in more than 50 years, on everything from unemployment to corporate profits. The recent drop in oil prices will likely help today’s situation, as will the proactive steps the government is taking to bolster the economy.

Another big difference between now and 2008, is the prevalence of social media and the increased number of media outlets, private blogs, and social media, all of which are competing for attention. This causes a lot of dramatic and often incorrect information to be put out.

Look for the Current Opportunities

One upside to uncertainty is that it can create an opportunity. Here are four facts to consider:

  1. Markets move on perceptions and uncertainty in the short run, but on fundamentals in the longer-term. We believe that the fundamentals are very strong, and this will reflect in the valuations over the longer-term. As such, the current environment can be a good opportunity to explore if it fits your individual situation.
  2. The volatility we are seeing is not unexpected; that is why we have worked with you to have fixed income and cash on hand to help balance your portfolio. Our Personal Vision Planning process takes into account market and portfolio corrections like the one we are experiencing now. Therefore, we are not recommending any major adjustments.
  3. Market corrections may provide opportunities for investors, including an opportunity to rebalance or invest at lower valuations, to make tax swaps, to convert IRAs to Roth IRAs with less tax impact on the lower valuations, and to rebalance your portfolio, if appropriate.
  4. Although there is concern about a global slowdown due to the Coronavirus, we have seen a typical pattern with other epidemics, where markets dip and then rebound significantly within 12 months. While the past does not guarantee future results, it can be instructive.

We Must Respond to Uncertainty with Calmness

The common thread between the past and the present market volatility is uncertainty—we simply don’t know where, when or how these phenomena will play out. In our experience, markets can handle bad news, but uncertainty is the one thing in this world that markets hate and fear the most. We have no control over the uncertainty, but we can and should have perfect control over how we respond to it.

Part of what drives feelings of anxiety is lack of information. Because the Coronavirus is new, many questions remain about the illness it causes. The more people learn, the better they feel. We have filled-in some of the blanks, it seems, like who it affects and how it spreads. We know who is more vulnerable and who is less vulnerable.

There have been at least four precipitants of the current decline:

  1. The outbreak of a new strain of virus, the extent of which can’t be predicted
  2. The economic impact of that outbreak, which is equally unknown
  3. The onset of a price war in oil
  4. Uncertainty about the 2020 election, both for president and also for the House and Senate

When a danger or threat is approaching gradually, it tends to be more frightening than when it shows up all at once. The good news is that, for most people, the Coronavirus is generally mild, and its flu-like symptoms of fever and cough do not last long.

We will ride this out together and stay calm. The last thing in the world that long-term, goal-focused investors like us do when the whole world is selling is—you guessed it again—sell. We understand that sometimes the inclination is to ‘stop the bleeding’ or to ‘wait for it to get better’. Ultimately this can cause far more harm than good. If you have concerns, please reach out to us. We will contact you if we feel adjustments are needed.

We Are Here for You

As always, we welcome your questions around this issue or any other matters. While we expect continued volatility in the broader markets, we also know that missing just a few of the best days has a very negative impact on returns over time. It is impossible to time markets and so we encourage you to stick with your long-term plan, while we continue to rebalance and reallocate as necessary. The mainstream media, social media and sometimes our friends will continue to focus on the negative, short-term and often speculative information. The media’s role is to sell advertising and not to inform. We will continue to provide resources and information via our website, personal calls, and planning meetings.

Thank you, our clients and friends, for being the most important part of Carver Financial Services. We are here for you and look forward to speaking with you in the near future. We recognize that the uncertainty with the spread of the Coronavirus and the current market volatility and can be distressing to many. We are also happy to speak to your friends or family, without cost or obligation, if they have questions or concerns—whether or not they are clients. We are always stronger together and look forward to working through this current situation with you.

For more resources, please visit our Coronavirus Covid-19 Resources page.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Carver Financial Team, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. Converting a traditional IRA into a Roth IRA has tax implications. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.