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“Don’t Just Do Something, Stand There” -Dwight Eisenhower

Back in 1987, right after the infamous “Black Monday” decline (which took the Dow Jones Industrial Average down by 22.6%), the cover of Barron’s featured a suitcase with two frightened eyes of a panicked investor peeking out of its dark recesses and an arm reaching out waving a white flag of surrender.  Selling immediately after Black Monday would have been a mistake and buying immediately after would not have yielded any long-term value.  The right decision was to “Stand There” and collect the necessary information and make an informed decision.

After the worst market week since the 2008 financial crisis, and one of the worst months since the 1930s, that image of the eyes peering out of the briefcase represents how many emotional investors are feeling right now. The market finished February with a remarkably bad week of negative returns, including consecutive days of 1,000-point drops in the Dow and a February decline of 7.5% in the S&P 500 index.   March opened trading with a big up day on Monday, followed by a big down day on Tuesday, and as I write this letter on Wednesday morning, a rally is underway.

HCM believes that the best course of action is almost always to avoid a knee-jerk emotional response, similar to what we have been witnessing recently from many investors. We are collecting relevant data, considering our response from a variety of perspectives and then taking action, if necessary, to help protect the long-term financial future of our clients.  Sometimes that calls for steps to be taken, and other times, it requires doing nothing.

Could all this volatility be foreshadowing an opportunity for patient, disciplined investors?  Very possibly!  The answer to that question will likely be revealed over the next few weeks.

If you’re open to hearing some good news, consider that:

  • The actual long-term value of the companies you own are not worth any less, as businesses, than they were a week or two weeks ago.  The market drop is simply a panic attack, nothing more and nothing less.  If the panic goes far enough, the HCM Investment Committee will execute the protocols that we have written and rehearsed many times.
  • The markets always have been and always will be cyclical.  Living with that reality is simply part of being an investor.  The important question is, can we profit from these cycles?  The answer is yes!  To do so, we must focus on the opportunities that present themselves during difficult markets when we enter the actionable stage of the market cycle that will offer us opportunities.  Some of these include:  
    • With interest rates at historical lows, the opportunity to refinance your home and lock in an interest rate for twenty or thirty years that is lower than the yield on a portfolio of quality-dividend paying stocks that increases every year may soon be upon us.  
    • Converting assets that may have been hit hard by recent market volatility in a traditional IRA to a Roth may allow you to substantially reduce the taxes you would otherwise pay to convert those assets later or when you are forced to take them out as part of a Required Minimum Distribution.  This step can enhance future family wealth.
    • If the market’s internal indicators suggest a shift from a simple correction to a full fledged long-term bear, we will shift our Advance and Defend™ portfolios into a defensive posture and patiently wait for an opportunity to buy stocks from panicking investors when the proverbial “baby is tossed out with the bath water.”  This is how seasoned investors take advantage of the market cycle and the emotions of others.  Of course, no one rings a bell at the bottom, and there is no guarantee that this process will be successful. It is not our objective to buy at the absolute low point of a bear market; however, there are typically identifiable patterns that show themselves when emotion is taking over.  We have not seen those indicators yet.
    • Those HCM clients that have a sufficiently long-term horizon and who have elected HCM’s Strategic portfolio solutions will continue to see regular rebalancing actions triggered in their portfolios as market volatility causes the relationship between asset classes to fluctuate.  This is a forced “buy lower, sell higher” discipline.  

 Does the fact that we have seen rallies recently mean that the threat of a bear market is behind us?   Unfortunately, no.  If fact, Doug Johnson, HCM’s Chief Investment Strategist, pulled together the following charts (marked by the years of each event) that show that almost every bear market in recent history has started with a decline followed by a rally only to give way to an even deeper decline.  So, regardless of last week’s action, we expected to see some short-term strength which gives us the necessary time to give thoughtful consideration to potential Advance and Defend™ portfolio adjustments.

Unfortunately neither we nor anyone else has any idea how long the panic attack is going to last, and we don’t yet know whether the triggering event—the Coronavirus and more precisely COVID-19—will spread into a pandemic, and if it does, how much damage it will do to the world economy and markets.  

Even though a lot of attention has been given to the virus’s impact on the markets, the more important issue is, of course, the health of you and your family.  You—like us—should be closely monitoring the spread of the disease and following the advice of the CDC.  

You should know that simple surgical masks will not protect wearers from the virus.  Medical experts say that we should be conscientious about washing our hands the right way and using hand sanitizer and cleansing wipes.  

There doesn’t appear to be a working coronavirus test at the moment, so watch for the symptoms: fever, cough, runny nose, shortness of breath.  There is no cure, but experts recommend resting and avoiding overexertion, drinking plenty of water, using a clean humidifier or cool mist vaporizer, and taking aspirin, ibuprofen or naproxen for pain and fever.  In 98% of the cases, the disease is not fatal, but it does seem to be more dangerous for older/retired people and those with pre-existing conditions.

Our wish is that you and your family will stay well, and that the virus will not become the pandemic that many (including market traders) fear.  And please understand that we (just like everyone else) don’t know what the market will do over the next several weeks. The panic might continue, or we might experience a quick recovery.  Historically, the best plan when bear markets present themselves is to follow the strategy you put in place, in advance, then diligently follow the preponderance of evidence as it presents itself and execute your plan.  That is what HCM will be doing. Our observations, along with economic indicators, will inform our planning and portfolio decisions.   

As always, if you have any questions about the markets, or strategies that you may be able to execute to turn lemons into lemonade, please reach out to your Advisor at your convenience.

Sincerely, 

Michael T. Hengehold, CPA/PFS MST RICP® 


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