The impact of the COVID-19 Coronavirus pandemic on the financial markets and your retirement investment portfolio: in this live webinar presentation to clients of Pure Financial Advisors, Inc. on Tuesday, March 17, 2020, Pure’s President, Joe Anderson, CFP® and Pure’s Executive Vice President and Director of Research, Brian Perry, CFP®, CFA, discuss the current state of the financial markets and take questions from attendees of the live presentation.
00:00 – Introduction
01:19 – The Financial Impact and Social Impact of the Pandemic
03:36 – Bear Markets and Recessions are Part of the Financial Cycle
(Watch Brian’s Comprehensive Guide to Bear Markets)
06:37 – Current State of the Financial Markets
07:45 – Current Bond Yields
09:05 – Slides: The Vix CBOE Volatility Index
09:51 – Gross Domestic Product (GDP): What Kind of Recovery from Recession Will We Have?
10:59 – The S&P 500 Over the Past Year, Emerging Markets
12:25 – Oil Prices Have Collapsed – WTI Crude
13:14 – The Economic Impact of the Slowdown, The Trade War and the Election
15:03 – Should I Change the Asset Allocation in My Portfolio?
15:54 – Should I Go to Cash?
16:52 – Strategies to Ease Nerves in Times of Market Volatility
18:59 – Are Global Markets the Same as Emerging Markets?
20:11 – How Are You Rebalancing the Portfolio and the Proportion of Global Markets Given the Worldwide Pandemic?
21:38 – Are Dimensional Fund Advisors (DFA) Funds Solvent?
22:36 – Mutual Funds
23:10 – Are We in a Recession? Will the Markets Fall Further?
24:20 – Fluidity of Recession and the Possibility of Market Timing
25:50 – How Does Machine Trading (Artificial Intelligence or A.I.) Impact Market Volatility?
27:30 – If I Had to Retire Next Month, How Would That Change My Asset Allocation?
28:54 – Pure Financial Advisors’ Holistic Financial Planning Process
30:10 – For Our SDG&E / Sempra Energy Clients: What is the Status of the Energy Sector in Stocks?
32:03 – Will Pure Financial Advisors Continue to Operate as Normal Through the Pandemic?
33:06 – We’re in Uncharted Territory Now. Doesn’t This Call for a Different Approach to Money Management?
34:46 – I’m 63. Given Current Market Conditions, When Should I Opt to Collect My Social Security Benefits?
36:03 – My Portfolio with Pure Financial Advisors’ Has Underperformed the Market in the Past. Will This Underperformance Benefit Me in a Recession?
37:53 – Did Diversification and Having a Globally Diversified Portfolio Help Me in the Market Downturn?
39:45 – Attendee Feedback on this Form of Communication
41:58 – Paraphrase from Jonathan Clements: If You Believe Corporate Profits will Steadily Increase, Markets Will Steadily Increase, and That Humans Will Continue to Progress Over Time, Why Would You Get Out of the Stock Market? (listen to the Your Money, Your Wealth® podcast featuring Jonathan Clements talking about this topic.)
– Thank You
Joe Anderson: This is Joe Anderson President here at Pure Financial Advisors. The main speaker is Brian Perry. So I’m going to give him the stage and the camera, but I’m here to help out. We want to get your questions in regards to your thoughts, your concerns about what we’re doing here at Pure about your portfolio and the markets in general. It’s been kind of an interesting past couple of weeks, as we all know. So we thought we would try to do a live streaming, after the market closed here today on Tuesday, just to give you a little bit better insight on what to expect in the overall markets, what we’re doing here. Brian Perry, he’s a CFA, CERTIFIED FINANCIAL PLANNER. He basically runs our investment team and department. Director of Research, he has 20 years experience. Most of you have met Brian in the past but I want to turn the floor over to him to have him give you the insights that I think we’re all anxious to kind of dive into.
Brian Perry: Thanks a lot, Joe. Yeah. Welcome to everybody remotely. In this day and age, it’s as close as we come to anybody, but we continue to fully function and all our trading capabilities, all our financial planning capabilities, our advice delivery, all remains intact. We’re just doing it all remotely to keep everybody safe.
So yeah, you know, you talked about the interesting times and I’m always reminded at times like this of that old Chinese proverb, and there’s debate about whether it’s a blessing or a curse, but the old saw about, “May you live in interesting times.” And certainly, this is interesting times, unprecedented times in some regards, where over the last 15 or 20 years we’ve seen SARS and the bird flu and stuff like that, and I’ll be fully candid in saying that I kind of expected this to be something similar, and it certainly morphed into more than what those episodes were. And so, you know, I was I was on air a couple weeks ago saying that I didn’t think that this would be quite as big of a deal as it is you know an end to a degree I’m going to keep this as an economist and a finance person, I’m not a doctor, I don’t claim to know that medical spread and stuff like that. But to a lot of degrees, what’s hurting the markets and what’s hurting the economy is not the disease itself – and not to minimize the impact of that – but it’s the financial impact, right? It’s people’s responses to this and the fact that essentially Americans’ way of life as we know it has been to a degree shut down. No March Madness, no NBA, no sports, no Broadway theaters, AMC movie theaters have closed now, Disneyland has closed, social distancing is a thing now, where Joe and I as we record this are keeping a respectful distance from each other. You know, so the very way of life that people have become used to has been impacted significantly. And in that kind of environment, it comes down to investors, human beings, we’re all just biologically designed to flee or fight. And this is a situation in a lot of regards that reminds me of September 11th in the sense that the September 11th attacks were very tragic, but it was the economic response afterward, the changing of behavior of not traveling and stuff like that, that really helped tip the economy into recession. But there, there was a common enemy, somebody to unite against with the Taliban and al-Qaida and the like to get angry at and the fight response. And here, there is nothing to fight, it’s a virus. There’s nobody to be angry at. And so I think that people, in general, are fleeing. They’re shutting down and they’re selling securities and trying to get out. You know, and this time is different, every bear market is different, and for those of you that have seen me speak in the past at our Lunch ’n’ Learns and things like that, I for a while now have been talking about the fact that bear markets are part of the cycle. Recessions are part of the cycle. We have these on an ongoing basis. In fact, if you look at it, on average, financial markets fall once every 12 months by an average of about 14 percent. It’s a very common thing. And yet, in most years, markets actually go higher. And so in a lot of cases, it’s a year in which markets at some point fall and demonstrate negative returns and then end the year positive. There are times though that we have a bear market. The statistics are such that over the last century or so we’ve had about 90 corrections and a correction in the financial markets is usually defined as a decline of 10 percent or more from the high. Bear markets, on the other hand, are defined as a drop of 20 percent or more. And at the lows, we’ve been down about high 20 is close to 30 percent on some of the major indexes. So this is a bear market, and in fact, 30-35 percent is an average bear market, depending on how you want to measure it. Most of the time in a bear market, stocks fall by about that amount. You know, the last two bear markets that we had prior to this, which were 2008-2009 and before that 2001-2002, were two of the more severe bear markets post-World War 2 in which we were down about 50 percent in each of those cases. Not to say that we couldn’t go down 50 percent in this environment, but that would be historically an exceptionally bad bear market. Where we are right now is closer to a typical bear. And here at Pure we’re believers that the future is impossible to predict, or at the very least very difficult to predict. And so we don’t try to do that, but we do rely on the empirical research and the data which says that if you follow history we’re closer to the bottom than the top – or the beginning, rather. We’re closer to the end of this decline and you know, we don’t know exactly when it will end. But we do know that it will. And I think it’s important to remember that, although we’re in a bear market right now, and although we could very well tip into recession as a result of what’s going on, the sun will come out. Every bear market in history has ended. One of the questions that came across – and please as you go along, feel free to ask questions, type them into your browser and we’ll get to as many of them as possible.
Joe: Let’s pause there real quick, Brian, how do people actually ask a question?
Brian: Yeah. So I believe that there’s a Q and A bar at the bottom that they can click on and then type in the question and they’ll enter the queue.
Joe: Perfect. And then when those questions come up I’ll ask them. I need a job to do.
Brian: Perfect, no, that’s very important. That’s very important. Yeah. And so you know, on average, bear markets have happened. This to me is not as bad as 2008-2009 from a financial perspective. At that point, I’d been in the financial markets about a dozen years at that point, and I saw the financial system starting to collapse. I saw financial markets and bond markets and money markets seizing up, and had a very real fear that banks weren’t going to open. I think that central bankers, the Federal Reserve and the like, have learned a lot since then and I’ve been encouraged by the support that they’ve been giving financial markets.
Some of the more arcane aspects of finance are what really matter at times like these, things like money markets and commercial paper markets, which got renewed support from the Federal Reserve this week, the mortgage-backed security market, which the Fed came out and supported over the weekend and the like, and now we’re seeing the federal government come in with fiscal stimulus too, or talk of a large fiscal stimulus package. And Joe, you and I were just talking yesterday I think it was about what might cause the selling to come to an end, and to me, it’s two things really: it’s a cessation or a slowdown of bad news, right? Markets go up and down, not so much on good or bad but on better or worse. And if we can at least get a slowdown of the bad news and of the way of life that we know shutting down, I think that then that opens up space for good news to come in and good news, the biggest source of that would be a fiscal response, and that’s what we heard talk of today and what would happen the Dow rallied about a thousand points. And so you know, hopefully, that’s the start of something good. I don’t know that for sure. But we do know that this will come to an end. And what I want to do now is just talk a little bit about what we’ve done in advance for this, and how you prepare for a bear market. And generally, it’s not something that you react to it’s something that you prepare for, and that’s what we’ve done for all of you out there, with your initial portfolio allocation, right?
As you went through your cash flow planning and your financial planning, determining what appropriate portfolio made sense for you, and then owning a mix of both stocks and bonds, right? And those bonds, those high-quality assets have done exactly what they’re supposed to do in this environment, where we’ve seen bond yields come down quite a bit. We’re down more than half from a two and a half percent a couple of years ago to, we dropped as low as half of 1 percent on 10 year Treasuries. And so those bonds have been providing ballast in portfolios and our what are there to be sold either for rebalancing purposes, to buy stocks when they’re on sale, or to generate income for those of you that are living off of it. And so it’s been good to see bonds acting the way that we would hope that they would in this environment. So that’s something that you do ahead of time, right? Not react, but prepare. And you know, then it’s about staying the course and sticking with that long term allocation. And as a financial advisor, you know, I sometimes feel like a broken record giving that advice and I sometimes know that a lot of people hear it and that it can sound repetitive or trite, but it’s so true that the worst thing that people can do during difficult markets is sell, because every bear market in history has seen a recovery.
The longest recovery in history was following the Great Depression, where stocks made a low in 1929 and then didn’t make a new high until 1954. But even in that worst-case scenario where we had World War 2 in the interim, even where we had breadlines and the like, we still recovered and eventually made new highs. And so you know, I don’t see any reason why this would be different. Let’s pause and I just want to show a couple of slides here around some of what’s going on in the financial markets.
And so for starters, what we want to look at here is just the level of fear that we’ve seen in financial markets. And this is the VIX. So this is a measure of volatility in the financial markets. And what’s most interesting to me here is that this goes back from 1990 or so, and you can see that recently it spiked up near 82. The numbers themselves aren’t so much important, but what really is interesting is that if you look at 2009, the level of fear, the level of volatility being measured in the financial markets wasn’t as high as it was last week. And that to me speaks to just how frightened people are by what’s going on. And that sense of panic that we’ve seen in financial markets, which again, seems to be slowing down and dissipating is the fact that markets were reacting more severely than they even did during the financial crisis. And the reason why is simply the fear that the economy will slide into recession. And to be honest, I don’t have a crystal ball, but I suspect that we will see a recession. Recessions again being a normal part of the economic cycle. This chart shows one of the reasons why: if you look at the right-hand side it shows the breakdown of gross domestic product in the U.S. and you see the light blue there. 68.1% of the U.S. economy is domestic consumption by the consumer. And so if the consumer is the main driver of the economy, and consumers are essentially unable to go out and spend at the moment, then that would lead to a slowdown in economic activity. To me, so what’s important though, is not whether or not we go into a recession, it’s what kind of recovery we have. Do we have a sharp V-shaped recovery, or is it more of an L-shape where we drag along the bottom? Because make no mistake, there will be a lot of pent-up demand. I don’t know exactly when people will be able to go out and live their lives again, whether that will be in a couple of weeks or a month or two or something like that. But as the weather warms across the country, and as the economy returns to normal and the virus dissipates, there’s going to be a lot of pent-up demand for leisure, travel and the like that I suspect we’ll give us a relatively robust economic recovery when it comes about.
In the meantime, we have seen a pretty sharp sell-off in stocks. When you look at the S&P over the last year, you can see that we have enjoyed quite a bull market and even as early as February we were making new highs in the financial markets. Before this very sharp sell-off and then, again, a rebound here today. But you know recently we sent around a communication on the financial markets and talked about framing and the importance of how the story is positioned, and so while it’s true that stocks are off the better part of 30 percent in the last couple weeks, what’s also equally true is the fact that stocks have had a really good run over the last five years. And so if you look over the last five years, stocks have done quite well and despite the recent drop off, we’re still quite a bit higher than we were even when President Trump took office. And so, it’s important that in the face of an onslaught of negative news, you consider the fact that, just because the news is all being framed poorly doesn’t mean that there’s not a lot of good news in there as well. And in fact, stocks have had a very good run over the last five years and over the last 10 years, even taking into account the recent price action.
Looking at some different parts of the portfolio. One area that we could see some improvement in would be emerging markets. And emerging markets are something that hasn’t done as well, with the exception of 2017, haven’t done as well as U.S. markets over the last decade or so. But when you look, there are a few things going on now that could help over there. One of them is simply the fact that oil prices have collapsed. So oil’s gone from over $70 a barrel down to around $30 a barrel here. And a lot of the international markets, the emerging markets, particularly China and the Asian economies, are very big oil importers, and so when you look at the price of oil dropping significantly, that serves as quite a boost to some of the larger emerging market economies. Again, not so much the Latin American countries like Brazil and Mexico, but those big Asian emerging markets like China could benefit from these lower oil prices. China also, although they suffered from this Coronavirus sooner, seems to be coming out or we’re hearing stories of economic activity in China, including in central China where the disease originated, picking up and beginning again and so we could see that part of the world pick up sooner than the U.S. even since they went into this first. And finally, I think that the one thing I would end with here and then we’ll open it up to some questions, is that remember that, just like what the virus where it’s most significantly impacting people that maybe aren’t as healthy to begin with, the economic impact is the same thing where, when we look at the economic impact of the slowdown, consider the starting point and the starting point was an economy that was doing pretty well as we came into the year, right? And consider some of the challenges that the economy faced and some of the concerns we had last year, despite a strong economy, I think they’ve dissipated.
And two that I would name that I think will play out a bigger role as the virus dissipates are, one is the trade war. I haven’t seen a single headline about the trade war since the Coronavirus picked up. And I think that in an environment where the world is coming together to fight against this disease and is also concerned about a global economic slowdown, the idea of trade war definitely slides the back burner. And once we come out the other side of the virus, the absence of trade war talk between the US and China could definitely provide a tailwind to the economy, as well as the financial markets. And the other one, and this is not a political statement as far as supporting one candidate or the other, but financial markets have been quite afraid of Bernie Sanders being elected president. And recently, Joe Biden has taken a pretty strong lead in the primary and seems to be the front runner there to position himself against Donald Trump. The idea of Bernie Sanders dropping out of the election potentially, or not winning, I think could be another something that was hanging over financial markets before Coronavirus that if that’s gone will also provide a tailwind when we come out the other side of this. So we’ll open up the Q and A. But I think the important takeaway here is that, although markets have been volatile, the external environment will lighten again at some point and diversified portfolios are going to do what they always do.
ATTENDEE QUESTION AND ANSWER SESSION:
Joe: All right. We’ve got a few questions coming in. A popular one, Brian: should I change my allocation? Is now a good time to change the allocation?
Brian: In general, no. But that assumes that your allocation was correct to begin with, which is the reason why we go through financial planning. In general, the reason that you change your allocation is not because of an election or a market decline or what’s going on in the external environment, it’s because of life changes. So should you change your allocation? The answer would be yes if your life is changed in some way. Let’s say that you got married, you had kids, your grandkids, you retired, etc. But assuming that your allocation was set up for your circumstances and your position in life, and was based upon your financial planning, no, I don’t think so. You probably have some safe assets in there that are doing OK, and you have some assets that maybe haven’t done as well lately, but that’s why we rebalance the portfolio is to sell what’s done well and buy some of what hasn’t done as well.
Joe: Piggyback on this one: should I go to cash? I guess you just answered that.
Brian: I mean, the answer to that would be yes, as you know, if you knew exactly when markets were going to rebound, right? But I think it’s important to keep in mind that the best days in financial markets usually occur immediately after the worst days, and we’ve seen that just in the last week and a half, where we’ve had a couple of 5 percent rallies after some really bad days. And so the problem with going to cash is that you need to be right twice. You need to be right on going to cash, and then on moving back into the markets. Also, I didn’t comment on this yet, but I think it’s important to realize that the fact that the stock market is a leading indicator and although the stock market has fallen a bunch and the economy may go into a recession, that doesn’t mean that stocks will continue to fall. A lot of times the stock market falls and then as the economy heads into a recession, the stock market picks up. And so keeping in mind that the stock market is a leading indicator would tell me that no it’s probably not the time to go into cash now while stocks are effectively on sale.
Joe: Would you think of a scenario where if someone had enough money, right, because when someone has the appropriate amount of dollars to accomplish their goals – no one minds market volatility when the markets go up. But then the nervousness comes with market volatility on the other side of the equation. What are some strategies that you can think of maybe to calm people’s nerves, so they don’t hurt themselves necessarily, by totally getting out of the market, by going into cash? But I know there’s a lot of people, they’re getting to a boiling point where it’s like, “I cannot take this any longer. I can’t necessarily sleep at night.” Are there ideas or things that you can maybe ease some of the nerves in regards maybe just don’t sell out to go to cash, but are there some other strategies maybe to ease some of that?
Brian: Yeah. I mean I think one is, obviously, controlling the things you can control, right? Which is knowing that, hey, if you have a taxable account, you’re doing tax-loss harvesting, which we’re doing so at least the volatility is not fun, it’s like turbulence on a plane. Nobody signed up for it, but if it’s part of the process, at least you’re getting some tax advantage out of it. You know, getting back to that initial allocation, hopefully, the initial allocation was appropriately set. But the one thing is I think that there’s the ability to take risk and then there’s the willingness to take risk, and a lot of times people confuse the two. And so just because somebody has the ability to take a risk, if they’re now extremely uncomfortable, it may mean that their willingness to take risk isn’t quite as robust as they previously thought. And so, I don’t know, that could be an opportunity to re-evaluate the financial plan and see if maybe taking a little bit of risk off the table is the right move. But again, it’s always measured steps. And when I used to work managing money for institutions, it was never about going from, Joe like you said, all to cash from stocks or something, it was going from 60 percent stocks to 55 or 50 or something like that if that was appropriate. So I think in general, people that make very drastic moves wind up regretting it. People that make measured moves or measured changes, sometimes that can be appropriate. But I think what you want to do first is run it through your cash flows and your financial plan and see if that’s something that still gets you where you want to go.
Joe: All right. A couple of other questions: are global markets the same as emerging markets?
Brian: That’s a good question. Emerging markets are a part of global markets, and so when we talk about global markets we’re really talking about the entire world, so including the US. And usually, there are three subsets: there’s the United States, there are international developed markets, and there I sometimes think of it as places where you don’t have to boil the water, so you can think of Canada, Australia, Europe, Japan, places like that. And then emerging markets are most of Asia, most of Latin America, Africa, and the like. Some people will break it down even further into frontier markets which tend to be smaller and less developed emerging markets. In our portfolios here we own all of those with the exception of the frontier markets, but we own emerging markets usually as a slice of the portfolio because emerging markets over time have produced higher returns but they’re also more volatile. So we use them sparingly to add a little bit of juice to the portfolio, but just like spice or pepper on your food, you don’t want to use too much. And then we also own international developed markets because there are a lot of great companies over there. You know, you have the Nestles of the world and the Toyotas of the world, I mean that of course, U.S. markets are the largest holding of the portfolios.
Joe: Subset question to that: how are you readjusting the balance of the portfolios in their proportion of global markets given the worldwide pandemic?
Brian: Yeah. So we’re rebalancing almost every portfolio practically every day, just because things are moving so rapidly. We use risk tolerance bands of about 20 percent on either side. So if a target for a position is 5 percent and it goes above 6 or below 4, we’re buying or selling appropriately. And that’s based on a lot of research; we actually just analyze that again last year to see if we wanted to tighten those bands in with reduced trading costs and decided that based on some statistical modeling that 20 percent still made sense. We haven’t changed our allocation to international markets based on what’s going on for two reasons. One is simply because, again, parts of the emerging world, in particular, went into the Coronavirus epidemic sooner, so we think they’re coming out sooner. So from a tactical perspective, I don’t know that getting out of emerging markets or reducing there would make sense, but also just valuations. U.S. stocks, particularly for larger growth companies prior to the recent sell-off, were a little bit elevated compared to historical averages, while a lot of the international markets are relatively less expensive, compared to historical averages, and so we like the idea of sticking with that allocation for the moment. But of course, we’re continuing to evaluate that, and if something changes then we’ll make an appropriate change. But we don’t want to be swayed from a long-term fundamental belief based on a movement that we think is temporary.
Joe: Can you comment on the solvency of DFA funds?
Brian: Yes, yeah, absolutely, no concern at all there. There’s a variety of protections in place and I would say this isn’t just for DFA funds. This is for any mutual fund or exchange-traded fund. They’re baskets of securities, and so the mutual fund company or ETF company itself, the solvency of that, even if it were to go away, you still own the fund with all of the underlying holdings. So in order to lose money, you would need every single underlying company to go under. Which I think is unrealistic and would never happen. You know, as far as the money being protected, it all sits at a custodian, a third party, where there is SIPC insurance and the like. So we don’t have any concern at all about the solvency of any of either the custodians or the fund companies. And even if that solvency came into question it wouldn’t impact the value of clients holdings, other than potentially on a very short term for a day or two with pricing issues or something like that. But in any time frame over that, it wouldn’t have any impact on clients’ portfolios or values.
Joe: I think people get confused there with all sorts of different types of mutual funds and the liquidity of them, versus maybe another type of product. Because in a mutual fund they’re basically carrying the underlying securities within the mutual fund, so they’re owning those stocks.
Brian: Yeah I mean I often think of it like a food store, right? Like if you go to Vons and let’s say that Vons hypothetically went under, it doesn’t take away the value of all the Heinz and Campbell products on the shelves, right? You jut pick those products up and move them over to Albertsons – and the mutual fund is really the same thing.