10 Mar 2020 Beacon Flash: Are We OK?

Times are scary. Virus numbers are growing, countries are closing their entire borders and ordering their citizens to stay in their homes, and uncertainty over how long it will last and how bad it will be for economies prevails. Yesterday’s shock to stocks was caused by the outbreak of an oil price war between Russia and Saudi Arabia, sending crude prices down 24%. The S&P fell 7.6% bringing the total decline to 18.8% since the market’s latest peak on February 19th. 

Why would cheaper oil be a bad thing for the economy? The answer is one of degree. Our country’s energy independence and strong economy are  due in large part to the successful extraction of oil from shale. But it is an expensive process, requiring a lot of development, labor and equipment. Generally speaking, when oil drops below $40 a barrel, shale production is no longer profitable, forcing shut-downs, endangering jobs of some 1.7 million Americans and large loans from major banks, which were off 11% yesterday. 

Before the stock market’s recent tumble, stocks had risen 12.2% over the period 1/1/2019 to 3/9/2020 and 410% since the Great Recession trough, which coincidentally occurred on March 9, 2009.

During its 410% rise the S&P 500 has experienced five ‘corrections’ or drops of more than 10%. Market volatility, whether defined as correction or bear markets is normal. But each correction or bear market has its own causes and associated fears making it seem ‘different this time,’ to rattle our confidence in recovery. But recovery always happens. 

The stocks we own represent thousands of great companies run by many more smart men and women who figure out the challenges of border closings, disrupted supply chains, dropping demand, and reduced productivity as employees work from home. They will find new profit opportunities in the changed landscape and creative ways to hang on while awaiting the surge of pent-up demand that will surely follow.

Don’t be surprised to hear talk of infrastructure legislation as policy makers look to keep the economy going through fiscal stimulation. There just may be enough bi-partisan support, during this contentious election year to get something done. The lure of taking a win to their constituents is strong motivation indeed. The Fed is also preparing to open its toolbox further to keep banks flush with cash.

Just as we see that Covid 19 has relatively minimal impact on healthy people, the US economy is facing this crisis at the peak of health. It can even be argued that the president’s earlier tariffs on China preemptively forced many businesses to be better prepared for the challenges presented by a closed China, than they might have been otherwise. No one knows how long these hurdles will persist or how much damage will be done to our economy, but we face it with an extraordinarily healthy and strong economy. 

Finally, the same can be said for your investment portfolio. We like to say that our portfolios are built for times like these and so far, they are living up to the promise. The market’s latest all-time high occurred on February 19th. As of yesterday’s close the S&P had fallen 18.8%, but the sum of the indexes that comprise the Beacon 60 was down only 8.34%.¹ 

The reason for the difference is due in large part to the strong bounce in US Treasurys of 8% during the same period. In times of crisis, many run to the unmatched safety of the US Treasury because no one ever lost a penny investing and holding to maturity a US Treasury Bond. It’s why we use them. Gold and other precious metals are often touted as safe havens, but metals have to be stored and kept safe at a cost. Treasurys provide portfolio insurance that pays you to hold it, currently 1.9% for our IEF 7-9 year index. It continues to deliver, crisis after crisis. 

As we write this note, markets have bounced 3.7%. As you know, we are not timers, so no calls on market bottoms from us. Rather the purpose of today’s Beacon Flash is to simply bring some perspective on the extreme market moves and assurance that we are here working to keep you financially healthy and as confident as possible in your future.

Please give us a call if we can help. 

¹ The chart represents actual index movements, which may be slightly different than portfolio values due to fees and differences between the exchange traded fund values we own and value of the indexes at any given time. Past performance is no guarantee of future results.