Stephen: If you want to know more about what’s going on in the stock market right now, and why it’s been a little bit frightening lately, then you’re going to want to watch the rest of this video.
I’m you’re host, Stephen Rischall, along with my co-host Neal Frankle, and this is the Smart Money Show.
Welcome back and thanks for tuning in to another episode of the Smart Money Show. Today we’re talking all about the stock market and why it’s been kind of haywire lately. In fact, Neal you probably heard the news, today was a historic day, and not for good reasons.
The S&P 500 and the Dow Jones Industrial Average, both suffered their largest single-day, point loss ever, in history. Not the biggest percentage loss, but the biggest point loss in history.
When we look over the last 12 months, the S&P 500 is basically flat, now so it’s up a measly 0.13% from March 9th of 2019 to March 9th of 2020, and that’s where we are at today.
Neal: How about for the year-to-date for 2020?
Stephen: If we look at the year-to-date, not a pretty picture, down almost 15%. It’s 14.9%, that’s the S&P 500 year-to-date as of January 1st to March 9th 2020. Down about 15%.
So you know, some people are asking is the economy falling apart or what’s going on here?
Neal: Before we get to that, lets talk about the health fallout for a second here. So far there have been about 4,000 deaths from COVID-19. Most of those have been in China. Also, most of the people who’ve died were over 60 years old and had a serious pre-existing health condition. Not 100%, but mostly, and most people who contract COVID-19 will never even know they had it.
The odds of you or me dying from this are pretty low, even though I’m 60, I’m 62 actually, but still the odds of either of us dying from this disease are extremely low. If you believe the numbers that are coming out of China, there are fewer cases of infection and death that are being reported everyday in China. If that’s true, it’s possible that after another month or so the number of reported cases and fatalities around the world could start dropping as well.
Stephen: Right it’s definitely good news, but I meant, there’s plenty of things out there that could kill you.
Neal: Right, unfortunately the list is endless. But here’s something that might surprise you Stephen, did you know that about 1 million people die every year from HIV and AIDS?
Stephen: Wow, I actually had no clue the number was still that high.
Neal: Yeah, neither did I, and did you know that over 1.2 million die on the road every year, or, that 600,000 people die every year from the flu?
But you know why people don’t freak out about any of those three things, it’s because the news doesn’t cover them 24/7. If every time you open up the TV, you know, and it said “here is how many people died in car accidents this morning” and then an hour later it said “here’s how many died in the last hour”. You might think twice, or three times before you get back in your car right?
So today you can’t listen to the radio, or watch TV, for more than like 10 minutes, before getting some catastrophic news about COVID-19. And that’s part of the problem. You probably don’t think about these other health risks because they’re just not in your face all day long.
But it’s really important to put things in perspective, because the odds are very very low that it will impact you. Now the odds of dying from COVID-19 are much much lower than the three things we just talked about. But people are a lot more afraid.
Stephen: Yeah we don’t even think about those things and I’m in my car practically everyday. Anyways, let’s get back to the economy.
We’ve been having people ask us, sending us emails, asking us questions like, is the economy going to implode?
I don’t know what you think Neal, but look, I was out over the weekend. I’ll give you an example, I went to the grocery store this weekend down the street, not the stock up on supplies, I’ve already got my earthquake kit, glad to see everyone else is stocking up now, and what did I see? Tons of people at the grocery store, it was busy.
People are buying food maybe some are stocking up on supplies, lots of everything, but they were buying food and groceries, they were using their credit credit, and swiping that to buy these goods, making transactions.
The parking lot was full, so people were driving there, they had to obviously fill their car with gas, or plug it in to charge their battery, to get here in the first place. So none of this stuff seems to be stopping, to me.
And how about you hear people saying that more people are staying at home. OK, so I also stayed at home this weekend with my girlfriend, and you’ll get a kick out of this, true story, on Saturday night we snuggled up on the couch, we ordered some takeout, right we ordered some takeout, and we watched Outbreak. We were streaming Outbreak and both that and Contagion were trending! So maybe that’s why people are so freaked out, because I mean, thanks Hollywood, that’s the movies, it’s not reality.
But look, people are staying at home more, and they are streaming entertainment, they’re ordering takeout, they’re ordering goods online. These goods are all being delivered by delivery services, those trucks, and the trains, and the ships, and everything all take fuel and oil and gas.
You know, for those of us that are working from home, alright we’re using email, and shared file services, and virtual meetings. So if you ask me, businesses in America are definitely still in business.
Some are definitely taking a bigger hit than others. It’s pretty obvious to see anything related to travel and transportation to some degree has been hit pretty hard. Cruise Lines, Airlines, Hotels, Rental Cars, they all got crushed so far this year. Not the greatest situation, and it might take them longer to get out of this this hole.
Neal: I agree with you, I also don’t think the economy is falling apart. As of the end of February, the economy added 273,000 jobs. Unemployment went down to 3.5%. Wage growth came in at 3%, and they’re really good numbers.
But you know what? It doesn’t matter. The market and investors are scared to death. The market isn’t looking at what’s going on right now, it’s looking at what might or what could happen, and that’s why the market has tanked since the beginning of February.
Stephen: That’s a fair point. You know what really surprised me, and I think it surprised a lot of people. Seeing interest rates here in the U.S. drop. It dropped by half a percent, that’s a really really big number, as far as US interest rates are concerned.
How about oil, right? Oil over the weekend here just dropped 25%. Now, normally lower interest rates and lower oil prices translate to a positive thing for the economy, yet the market tanked on the news of these things. What’s up with all that?
Neal: Very important observation. The FED made a decision to drop rates in an effort to help businesses and consumers, I think it was a mistake and apparently so does the market. So when rates go down, theoretically prices go down because it costs less money to borrow money and for businesses to make things, so then consumers are helped.
But you know what, in this situation, let’s even say that interest rates leads to lower prices. People are not going to go on a cruise or go to a concert just because prices are lower. That’s ridiculous, it was a silly move. People looked at that as a a drastic measures to signal, oh things must be really terrible so they overreacted.
Likewise with oil prices, they cratered because Saudi Arabia and Russia disagreed on oil production. So the market misinterpreted that, and said that price the decrease, in my opinion, signals that there’s a huge decrease in demand. Meaning that the market saw oil prices as a signal that the economy is slowing.
Well it’s true that the economy is slowing, but not by 25% in one day, that’s ridiculous!
Stephen: So is all of this just irrational and emotional selling?
Neal: Well I’m going to contradict myself just a little bit. I really don’t think it’s totally irrational. A lot of emotions, but it’s not completely emotional or irrational.
Look COVID-19, this coronavirus is scary, it’s highly infectious and is estimated to be 30 times more fatal than the regular flu. China has about 60 million people on lock down. Italy as of this this afternoon is closed for business, and around the world travel restrictions are going to be implemented in order to stem the spread of this disease, and those restrictions will likely expand to other parts of the world.
Stephen: Right, I was talking to one of my clients today, and she was telling me how her, and her company, they aren’t going to South by Southwest anymore, and that was a bit of a bummer.
And you know who’s really ticked off? Actually it’s my dad, he’s not going to see the tennis match anymore in Indian Wells. He goes every year and really enjoys that. I mean he’s still going to go to Indian Wells, but the tennis match got cancelled. So for all you tennis fans out there, sorry. And this is obviously a problem for the global economy.
Neal: It absolutely is. As we talked about last week, companies are having trouble importing parts and goods from specific areas around the world, that’s going to hurt their profits. Likewise we’re seeing a big slow down in travel, and entertainment, and recreation. It’s going to slow global economic growth, and it could result in a global recession
Stephen: I do hear some people saying, and they’re really worried, that a global recession or even a depression is inevitable, as a result of COVID-19. What do you think about that?
Neal: The market is certainly behaving as if the recession is certain, but nobody knows. It’s way too early to know that. We looked at the economic numbers early and it looked good, they’re expanding, not contracting.
But a recession could happen, but it’s not inevitable. Stephen you’ve done a little research, so let’s assume a worst case, let’s say there is a recession. Does that mean that all of our investments are going to just evaporate?
Stephen: I definitely think the answer to that is no. I think we’re going to be just fine. What we are looking at here is a chart of the S&P 500 since 1900. So a very, very long time. In those gray shaded areas we can see all the different recessionary periods.
Some of those were linked to major historical events like World War II and the Korean War. We had the .com boom and then the bust, obviously more recently we had the global financial crisis. None of these were good situations. But time and time again, humanity and the global economy have prevailed. We made it out of all these situations.
Neal: You’re right and I remember living through many of those events, but the point is when we’re going through them, it feels like, wow this is never going to end. It’s the end of the world, and it’ll never get better.
What you’re saying, if I’m hearing you right, is that in the past, which of course is no guarantee for the future, that even during periods of global recession, long term investors do fine, or have done fine in the past, is that what you’re saying?
Stephen: I would say so. Let’s turn to one of our favorite long-term investors and see what he has to say. Warren Buffett if you’ve ever heard of this gentleman, I think we all have, you might remember back in 2008, it was October 16th 2008, I put the article on the screen by the way, you should read this article, it’s still very poignant and timely for today.
Warren Buffett wrote this op-ed in the New York Times called “Buy American. I am.” He basically goes on to share with everybody that he believes, that with his own money he is changing a lot of his investments from Bonds to Stocks. This, as you know was as the global financial crisis was really gripping the the economy. He said, hey I’m going to invest in the stock market, now is a really good time to get in.
Let me show you actually what happened, the next few months after he did that. Here’s what happened, for the next 5 months after Warren Buffett posted that op-ed, and said he was moving his money into the stock market, he got his butt kicked.
I mean he was down over -27%, the stock market was down over -27%, so obviously that didn’t turn out so well. But we’re talking about long-term investing, and long-term investing isn’t 5 months, so let’s look at a five-year period.
Instead of 5 months we’re looking at 5 years now, after October 16th 2008 to October 16th 2013, and if you look at that period of time, you know Warren, yeah he lost some money up front, you can see that dip in the beginning. But he more than made it back and and then goes on to almost double it, up over 81%, the S&P 500 was up 81.9% over the next five years there.
So look, Warren Buffett, like usual, he saw value before value was realized and that’s what long-term investors do. That’s what I think we should really heed the lesson here, about having a disciplined approach to your Investments.
To summarize, yes things are scary, nothing lasts forever and this too shall pass. This actually reminds me of the movie I watched, so go check out Outbreak or Contagion, it’s scary but remember, that’s not reality, it’s Hollywood. But that’s how it feels when you’re in the moment and things are really scary, and people are worried. Remember even the most pessimistic health professionals, they’re not predicting anything close to those kinds of fantastical Hollywood depictions of these types of events.
The odds of this leading to a global recession, you know it’s still relatively low, but could it happen, sure it could. More importantly, there will eventually be another recession, I think that’s almost a certainty, I just don’t know when. Nobody knows when, like you said Neal, no one knows, but we’re going to have one. Just remember, we will come out on the other side and we’re going to be fine.
Last but not least, long-term investors, who don’t get spooked, and stick to a disciplined long-term investment approach, they tend to do much, much better in the market than those that get antsy and think they can time the market, and try their best to get in and out. That usually doesn’t end well.
If you have questions about your portfolio and about your Investments, give us a call, send us an email, let’s set up a time to meet and discuss what’s going on with your finances today.
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