Yesterday, we officially entered a bear market when the stock market closed more than 20% from its recent February highs. On average, we experience bear markets every three years, but this one stands out in the speed with which we entered it. In fact, it’s one of the most sudden bear markets ever: the average number of trading days from the most recent market high to entering a bear market is 137, according to Dow Jones. This one took just 19 days, making it the second fastest ever. See the charts below for more context on bear markets:
A decline of this magnitude in such a short time is unsettling for even the most seasoned investors. But remember, we experienced a meteoric market rise in the months just preceding this drop. From early October, 2019, to its February, 2020, peak, the S&P 500 jumped 17%. Moves of this size and speed also demonstrate the near impossibility of timing the market.
As mentioned above, the S&P 500 peaked on February 19th, and since then it has fallen over 26%, as illustrated in the table below. But, the sum of the indices that make up our Beacon 60 portfolio is down less than 15%, and our Beacon 45 is down less than 10%.
We understand any loss can be hard to bear, and the larger the portfolio the larger the loss in dollar terms, but our models are holding up well despite the stock market chaos.
Anytime the stock market declines like it has over the past few days, your portfolio can be thrown out of alignment and will need to be rebalanced. The picture below shows our Beacon 50 portfolio with its target allocation for each asset class on the right: U.S. stocks in blue, international stocks in red, cash in green, and U.S. Treasuries in yellow.
The Current Allocation, on the left, reveals that U.S. stocks make up 38%, well below their target of 44%. International stocks are 5% rather than 6% and U.S. Treasuries are at 51% rather than the prescribed 46%. Yours may look a little different than this, but shouldn’t vary by too much. When the time comes to rebalance, we will sell U.S. Treasuries, which have increased in value to near-all-time highs, to buy U.S. and international stocks that are now lower in value.
If you have a retirement plan at work, we will encourage and help you to do the same for these accounts. Rebalancing is a risk management technique that mitigates risk and adds the discipline of buying undervalued assets with the proceeds from overvalued assets.
Events, institutions, and businesses are closing at rates we’ve never seen before. Beacon is well prepared in the event one or all of us need to self-quarantine. We are an entirely cloud-based firm and as such our full business operations can be run from anywhere at any time. Trading, monitoring of portfolios, money transfers, financial plan updates, everything can be done remotely if or when it becomes necessary.
Along those lines and with everyone’s health in mind, we are asking that, as much as possible, all meetings for at least the next few weeks be conducted over the web and telephone using our Zoom screen sharing platform. If that’s not something you are comfortable with, as long as authorities allow, we can still meet at our office.
In closing, it’s important to emphasize that the stock market generally points to where the economy is headed, not to where it is right now. That’s why it’s called a “leading economic indicator.” While on solid footing a few weeks ago, the health of our economy will undoubtedly deteriorate over the coming months. While a bear market does not guarantee a recession, the stock market is indicating one is possible in the near future. If the market over-estimated the decline of the economy, there will be a snap-back.
I say this not to worry you, but hopefully to encourage you. It will be important to keep this idea of a “leading indicator” in mind as there may come a time where things feel worse, it’s harder to invest, more challenging to stick to your plan, and that our economy will never improve. But that may well be the time the market is ready to turn, anticipating recovery, even before the positive economic indicators themselves are announced. Actions by the Federal Reserve and Congress will also be helpful in boosting stock prices.
No one knows when things will begin to improve, but they will, and our primary goal is to make sure that your financial plan and investment portfolio are positioned for you to participate when they do.
We understand this is not an easy time. Anything with the potential to impact our health and our wealth can create fear and anxiety. We understand this and encourage you to call or email with concerns, questions, or simply because you need to hear and see that everything will be alright. Your plan provides the framework for robust statistical feedback on your future wellness. If changes need to be made, we will make them from a proven process designed to keep you on track even during tough times like these.
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.