Our thoughts regarding the current state of the Stock Market
and the effects of the Coronavirus
I sit here at my computer somewhat mystified as to what to write. February 24th, 2020 marked the beginning of this period of volatility that has shaved nearly 8000 points off the Dow Jones Industrial Average. I’ve also seen the shelves of our local grocery stores cleaned out of toilet paper and hand sanitizer, the NBA suspend their season, the NCAA deciding only to allow a few family members of the players in to watch the tournament basketball games, and fear taking over common sense in a lot of people. All because of a virus.
I’ll leave the projections on the number of cases we may or may not see, the number of deaths that may occur, and the effects all this will have on society to those with the knowledge and expertise to make those projections. What I want to address is what is happening to your investments and what our plans are.
When the virus initially broke out in China, it was severe enough for China to close some factories. Many of those factories made parts for some of our companies here in the U.S. Such as parts for Apple phones, parts for automobiles, TVs, and computers. This disruption in the supply line was believed to eventually cause an economic slowdown as there would be fewer phones, TVs, and computers being sold. Fewer sales generally means fewer profits. That makes sense as does the fact that once the virus goes away, those same factories will begin to ramp up production again and the supply line will be back to normal. A temporary problem that will affect earnings of companies for a time, but we anticipate this to normalize rather quickly after the virus peaks. As the virus spreads, it has hurt demand in certain industries, especially travel. In order to keep the virus from spreading, governments have put restrictions in place as to where people can travel to and from. This certainly hurts the profits of airlines, cruise companies, hotels, restaurants, etc. It has also caused a drop in demand for oil, which has caused oil prices to drop and oil company profits to follow suit. Again, we see this as temporary.
Unfortunately, investors tend to act with a “herd” mentality, and when someone decides it’s time to sell, they think that they also need to sell. With our 24/7 media coverage, people also get more information, or sometimes misinformation, and that breeds even more fear and uncertainty.
Linda and I have been advising people for a long time now and have been through these types of fear-infused panic selling many times, and the strategy that has worked out best for us is to ride it out, as hard as that may be. It is best not to join the “herd,” and to sit on the sidelines and wait. Even in their shorter careers, Jeff and Dan have seen that the herd mentality doesn’t work out too well.
For our clients who are drawing income from their portfolios, we generally keep enough money in cash or very liquid investments that we can ride through a year or more of this type of market without having to sell anything and turn a paper loss into a real one. In addition, most of your investments pay dividends and those help supply your income. The nice thing about dividends is that they stay pretty level regardless of the price of the stock.
For others, we design portfolios based on a balanced and diversified approach. We look for dividend income to help stabilize portfolios in rough times. We reinvest those dividends in more shares, and in times like this, those dividends will buy more shares as share prices are down. Like buying something on sale. And everybody likes a sale, right?
We all pray that none of you come down with this virus or any other sickness for that matter. Please practice good hygiene and take whatever precautions you feel necessary to weather this health problem. We also know that as you continue to get pounded with doom and gloom media reports, you will have concerns about your investments and your overall financial plan.
We are here to discuss your concerns so give us a call or make an appointment to come in.
Nothing in life is to be feared, it is only to be understood. Now is the time to understand more so that we may fear less. -Marie Curie
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.