Bear to Bull in Record Time

It’s been a crazy few weeks.

Over the weekend I’m going to spend some time trying to gather my thoughts about the current climate and its effect on your portfolio. In the meantime, here are some quick thoughts at the top of my mind and some information I am reading and consuming.

First, COVID-19… Take care of yourself and the vulnerable members in your family and community. Practice social distancing and wash your hands. Really. It seems COVID-19 is passed along primarily by proximity within six feet to an infected person. Which means, simply breathing near an infected person could be problematic. And, something we all should consider is people who may be infected with the virus are asymptomatic for most of their contagious period due to COVID-19’s long incubation period. It stands to reason we should avoid being in crowded spaces with people we don’t know if we can help it.

Some important links:

Center for Disease Control:

World Health Organization:

Also, worth a listen is the Joe Rogan Podcast who recently featured University of Minnesota professor and epidemiologist Michael Osterholm, who is also the director of the Center for Infectious Disease Research and Policy. A good bit of the discussion was around what we can do now regarding COVID-19

Second, we hit an all-time high in the stock market. The S&P 500 hit an all-time close on February 19 at 3386.

And then,

We experienced the fastest market drawdown into a bear market, ever. The S&P 500 went from an all-time close on February 19 to bear market territory by March 12. That’s just 22 days (16 trading days). To put some numbers in perspective, during the financial crisis, it took markets 274 days to enter a bear market, and the fastest drop (into a bear) from an all-time high is 55 days back in August 1987.

And then,

After one of the worst single-day drops in the S&P 500 in recent memory, it was followed by one of the best single-day gains. The S&P 500 (price index) declined -9.5% yesterday (March 12) which officially ended the 11-year bull market. It was the worst single-day performance since the financial crisis in 2008. Every position in the index was in the red. It was also the worst day in the Core portfolio’s existence.

But then just like that, the market returned +9.3% today, completing one of the best single-day performances since the recovery from the financial crisis in 2008. The Core portfolio bounced back nicely too.

Market timing is hard. I would say it’s impossible. “Experts” can’t agree on if we’ve seen a bottom, if the recovery will be “L-shaped”, “U-shaped”, or “V-shaped”. They do seem to agree the Trump administration’s, and particularly Trump himself, is incompetent. The chickens seem to have come home to roost. At all our expense. Until now, Trump was an existential threat to mainly brown and black people. Now his incompetency is threatening the well-being of all Americans. And the market doesn’t like it. Fear is rampant in markets. And every time Trump speaks on COVID-19, typically blaming Obama or “Gina” or saying a border wall will keep the virus out, the market reacts negatively.

But, Trump aside,

Market drawdowns are common. This chart shows the maximum intra-year equity market drawdowns since 1980 for the S&P 500. From this, you can see how frequently at least one double-digit decline occurs within any given calendar year. In 20 of the last 39 calendar years—over 50% of the time—the S&P 500 saw a double-digit pullback within the year. In every year, there was a market pullback and on average the market experienced a 13% decline. In the years when the S&P did experience a double-digit decline, 12 of those 20 times—or 60% of the time—the market ended the year with a positive return.

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Which is why,

You should only commit long-term money to the stock market. One of the reasons I am adamant about viewing the performance of your portfolio in five-year increments is because wild stuff happens in shorter time frames. On the other hand, it gets boring the longer you’re invested. In a good way.

ROLLING PERIODS375351327303267207147
GAIN FREQUENCY83.47%83.19%85.02%97.69%91.01%100.00%100.00%
MEDIAN RETURN13.63%12.16%11.34%8.69%8.42%8.01%8.23%
MAX ANNUALIZED53.62%32.81%28.56%21.64%19.49%12.21%11.62%
MAX TOTAL53.62%134.27%251.11%293.94%493.38%463.29%800.80%
WORST ANNUALIZED-43.32%-16.09%-6.63%-3.85%-3.43%3.76%5.62%
WORST TOTAL-43.32%-40.93%-29.05%-24.02%-29.48%73.95%198.45%
AVG. ANNUALIZED GAIN WHEN GAINING17.12%14.34%12.28%10.18%10.15%8.01%8.20%
AVG. ANNUALIZED LOSS WHEN LOSING-15.61%-7.53%-1.81%-1.99%-1.24%nana
 *January 1, 1988 to February 29, 2020

In five-year periods, the S&P 500 has had a positive gain 85% since 1988. The average annualized five-year gain of the S&P, when it had a gain, was 12.3%. But in the few five-year periods where the S&P lost value, it lost only -1.8% per year. In other words, since 1988, an investor in the S&P 500 had an 85% chance of gaining 12% per year over five years and a 15% chance of losing -2% per year. It seems like a pretty decent bet.

Here’s the trick though. There is no way to reliably tell which will be the good days and which will be the bad. There are plenty of articles on the internet that would tell you, “if you missed the best X days in the stock market, you’d be worse off by X”. And generally, that’s true. An article you’ll see much less is that if you were able to avoid the same X amount of the worst days, you’d be even better off. But again, there is no way to tell which days will be which and when.

If you find the guy or gal that can predict the ups and downs of the market, we need to all invest our money with him or her.

Oh, and did you notice, in 15-year periods or more, the S&P 500 has had a positive gain 100% of the time!?

The bottom line is you must be in it to win it. Market volatility is simply part of the process; to the upside (which we all enjoy), and to the downside (which is sometimes painful).

Which brings me to,

There are a lot of bargains in the stock market today. The precipitous decline in stock prices has spared no company. Often, universe-delivered calamities punish the stocks of strong companies unfairly. And that’s what we have today.

The last time this happened was during the financial crisis, and before that stocks of good companies were down in the wake of the events after 9/11. These chances seem to come once a decade. I don’t mean to be insensitive to those who are negatively affected by natural (or man-made) disasters. It is simply the reality of how markets work; when there is a lot of fear, there is a lot of opportunity.

I implore you, if you are hoarding cash you do not need for short-term events, consider funding your account. Decisions we make today, if made wisely, could mean outsized returns for the next decade or more (or until the next calamity).

I’ll leave you a few words from Warren Buffett. He wrote in an Op-Ed, in the New York Time is 2008 during the financial crisis, the following (link:

“A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

Here are some other interesting links:

“COVID-19: It’s Not About Europe, It’s About Incompetence”:

 “To Improve the US Coronavirus Response, Donald Trump Should Resign”:

“Clowns in the Time of Coronavirus”:

“The Best Indoor Games for Quarantined Kids and Families”: The 5 Siiiiiiickest Games for Quarantined Families
Thanks, and have a great weekend.

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