Coronavirus Update

As we are all now painfully aware, Coronavirus is here and making a huge impact on our everyday lives. School districts are closing, universities are finishing their semesters online, large events are being canceled, and essentially every sporting event is also being cancelled or postponed for the near future. For businesses that are able, most are having employees begin to work remotely, global travel is essentially halted, and even domestic travel has slowed down to levels not seen since 9/11.

The market has relentlessly been trying to digest all this information and figure out what it means for the economy and businesses moving forward. There is no doubt there will be slowdowns. The travel industry is already experiencing stock losses greater than 50%. The ripple effects from “social-distancing” are large and are going to affect virtually every type of business for as long as the Coronavirus scare lasts.

The government is now taking significant action by declaring a state of emergency. They are rapidly increasing the availability of tests and are working on various forms of stimulus for struggling industries as well as to individual citizens who will be most affected by self-quarantine. The Federal Reserve has also taken significant action by lowering interest rates a week ago and again yesterday. They also announced a new $700 billion asset purchase plan.

As of the market close on 3/13/2020, the global stock market is down nearly 23% from the highs. Since we have eclipsed the 20% loss hurdle, we are officially in a bear market. What is unique about this bear market is the speed at which we got here. The average number of days from peak to bear market territory is 255 days. This one took 19.

Will this affect my financial plan?
Although times like this can cause panic, it is important to note that these types of markets are expected and accounted for as we develop your financial plan. When we create a plan for a client, we estimate future returns for your portfolio. As we have discussed with many of you, we have been using a lower than historical return in order to account for current higher valuations (lower future returns).  Not only that, but we model the riskiness of the portfolio by a process called “Monte Carlo Simulation”, where we run the plan through thousands of different market scenarios, both good and bad. If too many of the bad return scenarios cause the plan to fail, we make adjustments.

If you are concerned about how the sell off has impacted your financial plan, please contact us so we can discuss.

Diversification Isn’t Dead
One thing this stock sell off has reminded us is the importance of diversification. For quite some time, diversification has been a drag on the portfolio as compared to US stock and bond markets, everyone’s typical benchmarks. Any attempt to diversify from US stocks and bonds has only led to reduced performance. This has led many to conclude that diversification is dead.

However, stocks can give back years of performance in a hurry. Global stocks for example are trading back at levels seen in early 2017. The asset classes that have done the worst over the past 5 years are now doing by far the best during this sell off.

Year to date, alternatives are actually up about 2%, despite stocks being down 23%, and bonds being flat. These types of assets reduce the risk in the portfolio, and as a result considerably improve the probability of a financial plans’ success.

One of the reasons we have always been so concerned with controlling risk, is because of the effect it has on investor psychology. Stock market sell offs, although scary, are not the most damaging thing to the success of a financial plan. As said before, we know these sell offs are going to happen, and the plan is built with them in mind. The most damaging thing to a plan is an emotional reaction to market volatility. If one sells after a market loss due to panic, it can jeopardize their ability to reach their long-term financial goals. Markets over time recover losses, but an ill-timed move in the market can leave permanent damage.

Upcoming Trades
With that being said, the current market environment has created the need to make changes. For one, we plan on rebalancing portfolios. Rebalancing is simply bringing the portfolio weights back in line to our desired target. In this environment stocks have fallen, while bonds and alternatives have risen. Thus, we need to sell bonds and alternatives and use the sale proceeds to buy stocks. Rebalancing is essentially “buying low and selling high.” In addition, we are changing the bond portfolio. During this sell off, yields have fallen dramatically. The 10-year treasury, for example, currently yields just 0.95%. This yield is a reasonable estimate for the type of returns you can expect from treasury bonds going forward. As we stated in our last WJNotes, after inflation, most bond returns will be zero or less for many years to come.

Counter to that, however, are corporate bonds. The yield that a corporate bond pays relative to a treasury bond (“the spread”) has expanded considerably. High yield bonds for example currently pay about 7.5% above what treasuries pay, compared to about 3.5% a month ago. We will be adding some corporate bond exposure to portfolios.

WJ in the Coming Weeks
Finally, we would like to share some of the steps WJ is taking regarding the continuing spread of the Coronavirus. Our number one priority is to ensure we maintain business continuity and provide a safe work environment for our employees and clients. As a result, we would encourage you to utilize our video conferencing service Zoom if you would like to have a meeting. Also, we will be available by phone if you would like to discuss your portfolio or financial plan.

WJ over the years has enhanced its software capabilities to become fully cloud based. All the software we use on a daily basis can be accessed from our computers at the office or at home at any time. We all have remote access to our office computer to access files stored on the local server. If it is necessary to close the office, we do not foresee any reduction in service while we are away. We are confident that we have taken the necessary steps to ensure the continued efficient operation of our business and we continue to closely monitor the situation as it evolves. We also appreciate that you or your businesses may face your own challenges during this period. Please let us know if we can help in any way. We wish you, your colleagues and your family all the very best through these difficult times.