“We realize that it is not easy to ride through this tempest. We know you want to hear when it will end. Believe me, so do we. Between now and when it ends, we are here to monitor and process the situation as much as we can so we can hopefully provide some comfort to all of you during a tough time.”

“Sure I am of this, that you only have to endure to conquer.” – Winston Churchill

Since the NCAA basketball tournament has been canceled, spring training called off, golf tournaments canceled or postponed, my gym closed, no movies to go to and my favorite restaurants and bars closed, I find I have a lot of time to reflect. One of my points of reflection has been the severe market sell-offs I have experienced in my 34-year career. You would think I could find something more uplifting to reflect on, right? It seems that none of them have occurred for the same reasons.

I started my career about a year before the crash of 1987 that lopped off 23% of the stock market’s value in one day. That crash had several reasons. A very large trade deficit led to our Treasury Secretary to push for a lower dollar, which motivated foreign investors to pull money from US investments. Computer trading was being used then and when the market began to move down, programs kicked in and overwhelmed the stock market with sell orders. “Breakers” were put in soon after to stop computer trading from totally overwhelming the markets.

The “dot com” crash of 2000-2002 peeled off about 41%. It was caused by investors losing confidence in stocks as valuations reached incredible highs. Also in 2001 a terrorist attack literally shut down our country for a number of days. Just prior to the crash, investors were throwing money at companies that had no assets or business plans, which then Federal Reserve chairman, Alan Greenspan referred to as “irrational exuberance.” I remember going to the gym on my lunch hours to work out and watching the financial news on the TV and seeing the stock markets tumble further and further each day. I was a glutton for punishment in more ways than one.

The sell-off of 2007-2009 was dubbed the “financial crisis” and it dropped the S&P 500 Index by a bit over 50% before all was said and done. Someone in our government decided that an admirable goal would be for every American who wanted to own a home to be able to do so. So some pressure, through regulators, was put on mortgage lenders to qualify more people for mortgage loans. This developed a lot of crazy lending practices such as “no-look” loans where lenders didn’t verify income or even employment. And also lending over 100% of the value of the property. These loans were then packaged up and sold to investors (mostly big banks and brokerage houses) as investment grade, mortgage-backed securities. Sounds safe, right?

Well, needless to say, a lot of these loans went bad and as these mortgage-backed securities became worthless, the solvency of these financial institutions became questionable. Lehman Brothers, a big and long-standing brokerage firm, went bankrupt.

While the causes haven’t been the same, the reaction and eventual path have. As investors see and hear the news, and see investment values decline, they feel pain. Then the pain turns into fear. At this point, we tend to look at all the worst possible things that could happen. That fear triggers a natural reaction in us to “do something” which leads investors into panic mode. People in a panic mode generally make poor decisions. In this case, selling their investments. It’s at this time, that we reach capitulation. Capitulation is the time when investors have had enough pain and throw in the towel. The stock market has a really down day or a couple of them and when the dust settles, there are no more sellers. Buyers eventually come in and we start the climb back up.

This current market is no different. A single-cell organism (virus) has created a lot of uncertainty in our world, which leads to fear, and you get the picture. I’m pretty well convinced we are not all going to die from this, but it is very apparent that many will, and taking precautions are necessary. It’s also apparent that the steps that our government has taken will help reduce the impact this virus has on people but it will also have a negative impact on our economy. We don’t know what that impact will be, which is creating fear and panic in investor’s minds. Therefore, we are currently seeing the panic selling. Capitulation will be next.

We realize that it is not easy to ride through this tempest. We know you want to hear when it will end. Believe me, so do we. Between now and when it ends, we are here to monitor and process the situation as much as we can so we can hopefully provide some comfort to all of you during a tough time.

“Sure I am of this, that you only have to endure to conquer.” – Winston Churchill

Sincerely,

Mike Berry, CFP®
Linda Eden-Wallace, CFP®
Dan Funderburk, CFP®, CKA®
Jeff Funderburk, CFP®

These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.

Copyright ©2020 Mike Berry. All Rights Reserved. Commercial copying, duplication or reproduction is prohibited.