Dear Mr. Market:
Today marks the anniversary of the stock market bottom 11 years ago. How ironic is it that on March 9th 2009, when the market and everyone in finance was curled up in a fetal position, we now are witnessing a market drubbing like we haven’t seen in years on that same anniversary date? For those with short-term memory lapses, 11 years ago the Dow Jones went from 14,164 in October of 2007 down to 6,547 on March 9, 2009. The “Financial Crisis” of that period effectively saw a -53.77% decline in the stock market. What has ensued since then happens to be the longest bull market run in history.
Per our post a couple of weeks ago (with regard to all the Coronavirus fears), things have been amplified with more panic and then an event that we have not seen in decades. Last night, crude oil dropped -31% sending the global markets into pure panic. We have not seen that large of a swing in oil prices since the U.S. invaded Iraq in 1991. For the first time in years the market was halted as the futures were down -7%. The next circuit breaker is set for levels of -13% at which the market would be paused for 15 more minutes and the final threshold is set at -20% where if that occurs the market is then closed for the day. For perspective, the largest percentage drop in stock market history occurred on October 19, 1987 where the Dow Jones fell -22.61% in a single day. We’ve written about that event before and you can see that article by clicking here.
What is a major concern now is how deep this correction can go and whether anyone knows if this is indeed the end of this historic bull market run? We actually believe that the world got a taste of this a couple of Decembers ago. Again, for a quick refresher, we point you to this article that was not your normal market behavior; nor was the incredibly surprising bounce back that we saw in 2019.
Whether financial pundits want to officially call this the beginning of a bear market or not, we have long been of the opinion that the time has arrived to call it just that…a bear market. By the thinnest of margins we did not touch the definition of one (being a -20% drop from peak to trough) but it was close enough in 2018 to call it exactly that. As a matter of fact, at one point during December of 2018, Small and Mid Caps were down -24.30% and -22.47% respectively.
Thanks for the history lesson Mr. Market but what to do now?
On one hand the initial reaction is that this could get worse before it gets better. It is totally normal to feel the real fear of what is looming in the darkness. Per the title of this article, however, “panic is never a strategy”. Let us be absolutely clear about one thing though…While we do expect a recovery of some sort, our opinion is that it will not be a 2019 sharp bounce back that shocked everyone. Once the dust settles people can get back to evaluating the fundamentals of this market and realize that we’re not going to zero.
On the flip side it’s indeed true that “it’s always darkest right before dawn”. We just don’t think we’re near a bottom with the amplification and frenzy that the financial media has added to these recent events. All that being said, there will be serious money to be made in this market. If you have the good fortune to own any bonds or other hedge type instruments, hang on to those positions now and sharpen your pencils. For anyone out there with more than a five minute time horizon you may have the opportunity of the decade to buy certain areas of the market that are simply getting overly punished. Also keep in mind that never in history has their been a 15-year rolling time period where the market didn’t finish positive.
This may not comfort some but the 2008 market debacle was horrible but it pales in comparison to what we saw during the Dot Com crash. The reason for this is simply because never in history (even during the Great Depression) did we see three consecutive years of negative returns. While we don’t think we’re headed in that direction there will be plenty for the market to digest in the months to come. All eyes will center around the election in November and while things are impossible to time, a clear direction of how to be positioned will present itself by then. For now, the reality of it all is that the stock market needed a reason to correct. Believe it or not, we are not anywhere near a recession but the realities of flirting with a bear market are firmly present.
Lastly, making panic moves in this market is dangerous. While panic is not a strategy, neither is hope. That being said, our advice is to gradually reallocate from your defensive positions into areas that have been hit the hardest. One must still stay within the bandwidths of your pre-set allocation and strategy, but if your portfolio is built out correctly, you should have enough “dry powder” to outlast this storm. Mark this day in your memory because as crazy as it sounds today, the market will be higher than it is now in the next five years. We don’t have a crystal ball and nobody else does either, but consider this a time stamp in history where we’ll gladly eat our words if we’re wrong.
“Stay disciplined to stay positive.”