At DPWM we aim to help our clients make sense of these trying times in the stock market. No one knows the future and where it goes from here, however we can lean on the fundamental data points and historical evidence to help us better understand what this all means and where we believe things will go in the future. Understanding the health of the underlying economy is critical in a time like this along with assessing similar stock market moves in the past and the long-term impact they had on our investments. Below is our assessment.

 

Economy

The coronavirus’ impact on the economy in the short run is substantial. With economy health measured by growth of gross domestic product (GDP), the impact of the coronavirus is projected to bring GDP to a screeching halt in the second quarter of 2020. While this sounds ominous and cause for concern, it’s important to understand the underlying health of the economy before the coronavirus came into play over the last few weeks.

 

In the first two months of 2020 the US economy added over 500,000 new jobs, the unemployment rate hovered at a sterling 3.5%. Manufacturing, housing starts, and retail were all up through the end of February as well. Depending on which analyst you talked to, projections believed GDP growth would clip along at a very healthy 2-3% for 2020. And then the coronavirus hit.

 

The coronavirus and the impact to businesses, supply chain, and consumer goods has some analysts seeing 0% growth of GDP in the 2^nd quarter of 2020 and a reduction of roughly 1% in annual 2020 GDP growth. However, the best question to ask yourself is if the economy was so healthy going into this pandemic, what are the long-term implications to GDP? While the short-term effects are apparent, there will be an answer for the virus or reduction in cases at some point in the future. We believe there will be pent up demand which will help nullify the short-term decrease in the economy’s growth. Simply put, when we look back in 2-3 years the coronavirus will have had little to no impact on the United States’ GDP, or global GDP for that matter.

 

Stock Market

US & global equities have been hammered in the end of Q1 2020 over the fears associated with the coronavirus and much less discussed but just as important complications coming from trade wars in the oil sector. While history is not a guarantee of what will happen in the future, it usually gives us a strong roadmap of what to expect. Since 1987 we’ve seen seven scenarios with such drastic drops over short periods of time such as Black Monday in 1987, Gulf War in 1990, Tech Bubble of the early 2000’s, Great Financial Crisis of 2008 and so on. March 12^th became the largest single day drop of the Dow since Black Monday in 1987.

 

Now that we’ve scared you, let’s look at what’s happened since these historical drops in the market over the preceding 12 months. The chart below shows that history has been kind to those who have stayed in the market through stressful investment cycles.

 

 

Taking a broader step back as long-term investors, even with the severe losses the S&P 500 has incurred in March with a closing price of 2,480.64 we have still seen over a 320% increase in the S&P 500 since the Great Financial Crisis of 2008-2009. An analysis from January 1^st, 2000 through December 31^st, 2019 was done and it was determined that if you invested $100,000 the whole period in the S&P 500 vs. an investor who mistimed the market and missed the 10 best days over the 20-year period, the difference in what your portfolio would be worth is shocking: Someone who remained invested had an account worth $324,019 and by just missing 10 days in a 20-year period watched their portfolio only amount to $161,706. If the investor missed the top 25 days the account value was a paltry $82,256.

 

So, what’s the moral of the story? Stick to the plan! At DPWM we work to hard to learn our clients’ goals and needs so that you aren’t over your skis in the investment approach we decided on. If you believe that you are long-term focused, then all historical data would tell us there is light at the end of the tunnel. While no one likes seeing a bear market, we lean back on the strong fundamentals of the economy and the historic evidence we have in how we approach our investments for the future.