As the response to COVID-19 widens, we constantly are watching markets, economies and portfolios. This is a fluid situation. However, the amount the market has moved as it searches for a bottom is not unprecedented. As a matter of fact, it is fairly common. Corrections are markets that are down 10 percent from some previous point. That happens, on average, between one to two times per year. Markets that are down 20 percent are less common but do happen quite often. In recent memory, less than a year and a half ago, October, November and December of 2018.
At that time, the Dow Jones Industrial Average fell from 26,743 on Sept. 21 to 22,445 on Dec 21. Roughly 16.07 percent. Now, from Jan. 2, 2020 to March 13, 202, t has fallen from 28,868.80 to 23,185.62 -- a drop of 19.69 percent. The market is searching for a bottom here, and we don’t know quite yet where it is. But when we look at bear markets, while past performance does not guarantee future results, history oftentimes rhymes.
This market is what we would call an event driven market decline. Do I have to say it? That event is the arrival of the Coronavirus (COVID-19). Other types of downturns could be categorized as structural (think 2008) or cyclical (think 1980). The latter two are typically longer cycles while event driven may often resemble the crash of 1987. While we have had the largest point declines 2,352 followed by the largest point advance 1,985 the next day. That downturn was a percentage decline on a single day being 9.9 percent followed by a 9.6 percent advance on the next day. In 1987, the decline was only 506 on Black Monday but that represented a downturn of 22 percent in a single day! So, the daily percentage decline is not even ½ of its movement in 1987. At that time, the press was reporting that we then were moving into a Great Depression as we had after the 1929 crash in the market. Of course, we didn’t; the market recovered in very short order and continued the longest secular bull market of all time. As it did then,the press quietly moved on to a different story to sell advertisements.
We will get through this.
We are watching the portfolios daily. Effects in the markets downward on equities has had a similar upward effect on fixed income and market neutral allocations. This has caused our discretionary portfolios to be off fractionally what the US equity market has been. It also has had the effect to lighten the allocation to risk assets and raise the allocations in less risky assets. In addition, the managers of many of the mutual funds have been making changes in their portfolios as well to protect on the downside or take advantage of upside. This without any trades the allocations in portfolios have adjusted the risk downward. We have held off re-balancing until the market somewhat stabilizes. At that time, the re-balance will most likely be adding to the risk assets to take advantage of an expected rebound. The situation is fluid at this time for tactical adjustments. The investor must always remember the long-term nature of allocated investments. Additionally, the nature of the type of investments should be remembered if they carry hedging strategies against risk.
We continue to monitor investments and welcome anytime you would like to discuss them or our strategies. Those with questions should direct them to Saling Simms Associates, 7965 N. High St., Columbus, OH 43235, telephone: (614) 841-1881.