​Dear Clients,

As Christians and people of faith, I hope you find this article below appropriate on a Sunday. We will be in the office, at least 6 feet apart, first thing tomorrow morning if you need to talk.

Hang in there, be calm and this too shall pass,
Brien

March 3, 2020/in Investing, Life /by Dr. Erik Davidson, CFA

“In this world you will have trouble. But take heart! I have overcome the world.”
John 16:33

While the Bible does not speak specifically about Coronavirus outbreaks or stock market plunges, it certainly does speak about plagues and pestilence, as well as periods of adversity and trouble. So, with that in mind here are some thoughts on the recent stock market sell-off from the vantage points of investment history, behavioral finance, and biblical wisdom.

In my many decades of investment experience, I have seen my fair share of market turbulence and even many “crashes”. During my career, there have been all matter of reasons to spark stock market sell-offs, however, this is the first time in my experience that a pandemic scare has been the catalyst for a significant stock market plunge. Yes, in the past, investors have expressed worries about health-related issues (Ebola, SARS, etc.), but nothing medical that I can remember has had the sort of impact that we are currently seeing. Not being a medical expert (although I am a “doctor”!), from my limited perspective, it seems that the pandemic concerns have legitimacy and therefore the potential to cause significant human and economic damage. While we may have some feelings of despair in the face of this challenge, as Christians, we can pray with confidence to God that the coordinated global forces of human ingenuity being brought to bear on this calamity will prevail. Even with that envisioned success, however, going forward, this new type of risk, global health, will now be a top-of-mind concern for investors for years to come.

While, most importantly, caring for and praying for those who have been afflicted (“Weeping with those who weep” – Romans 12:15), prudent investors nevertheless do need to consider the market implications of this medical emergency.  Stock market corrections (generally viewed by investors as the S&P 500 being down -10% from the prior high) are very common, coming on average every 11 months. Bear markets (generally viewed by investors as the S&P 500 being down -20% from the prior high) are less frequent, but still have visited investors on average every 44 months. With that context, it is important to remember that this 11-year bull market has been the longest in the history of the US stock market. That combined with recent all-time stock market highs, stretched valuations, record low bond yields, anemic economic growth, polarized political environment, and weak earnings growth, the probability of entering a bear market is material.
However, just because there is a heightened risk of a bear market does not mean that investors should reflexively “bail out.” Biblical wisdom certainly supports keeping one’s cool in the midst of adversity: “Do not fear, for I have redeemed you; I have summoned you by name; you are mine” (Isaiah 43:1). Further, while not directly addressing investment timing decisions, the Bible has many admonitions about making predictions and attempting to know the time and place of events.
​
Additionally, the evidence of financial history demonstrates that a strategy of “timing” the market by getting out when the market appears to be trending down and then attempting to adroitly get back in when the markets appear to have bottomed is fraught with risk, not the least of which is the necessity of being “right” twice. Additionally, research studies from Dalbar indicate that while the historical annualized return of the stock market (S&P 500) over the past 30 years (ending 12/31/18) is 10.0%, the average mutual fund stock investor return during the same time period has been just 4.1%. The biggest contributor to that underperformance differential was investors’ failed efforts to “time” the market, oftentimes being sucked into the market’s euphoria near market tops and “buying high,” while subsequently succumbing to despondency near market bottoms and “selling low.”
So, what is a biblically responsible investor to do in these circumstances? If an investor has a longer term (> 5 years) financial goal(s), then continuing to have a meaningful level of one’s asset allocation in the stock market is a prudent strategy despite the current market turmoil. In fact, further stock market weakness would likely be an opportunity to deploy more money into equities, i.e., buying low when stocks are on “sale.” Further, investors should consider the current market dislocations as an opportunity to “rebalance” their portfolios by trimming down slightly those assets which have performed better (e.g., bonds), and redeploying those proceeds into the recently beaten down asset sectors (e.g., domestic and international stocks, as well as commodities). Lastly, and most importantly, biblically minded investors should strive to keep these heartfelt concerns of life in their eternal perspective, including John 16:33: “I have told you these things, so that in me you may have peace. In this world you will have trouble. But take heart! I have overcome the world.”

Sources: Standard & Poor’s, Inspire Investing, and 2019 Dalbar Quantitative Analysis of Investor Behavior (2019)​

March 20, 2020

Dear Clients;
 
            Thank you so much for your serenity during this time of uncertainty.  Your patience and confidence is greatly appreciated.
 
As we continue to endure the uncertainty and market volatility associated with the coronavirus, we thought it would be helpful to point out some of the factors working in favor of not only the economy but also the markets.  The uncertainly is likely to recede only when the rate of infection comes close to a peak.  However, there are some considerations that should put a floor under the economy as well as financial asset prices.  First start with a few qualitative factors that are important to remember.

• Just about everyone in the medical community believes that the impact of the outbreak will be transitory with a limited duration.  In other words, whether it takes six weeks or six months, there is already light at the end of the tunnel.  We know this because life in China is beginning to resume as usual now that the crisis has become manageable both inside and outside of Hubei province. It is true that in order to beat this disease the Chinese government had to implement some pretty draconian measures.  But if that's what it takes, that's what we must do. 
• Second, we need to remember that this year is an election year.   Everyone knows that the best way to gain power is through strong leadership and successful management of this crisis.  Everyone knows the stakes; failure is not an option.
• And finally, we must keep in mind that unlike the Global Financial Crisis, nobody is at fault for our current predicament.  This is a very important consideration because there will be no concerns about bailouts and other support for those deemed to be responsible for the crisis. 
  • Our leadership, to include the presidential administration, Congress, and the Fed, is unlikely to face much backlash for implementing draconian and very costly measures to successfully defeat the virus. 
  • The public will be much more amenable to sacrifice in response to an uncontrollable force rather than an identifiable villain. 
  • A virus cannot be vilified or punished by the press or at the ballot box.
  •  The American people have shown repeatedly throughout history that they have the grit and determination necessary to prevail.

 
The following are more tangible reasons that the economy, after suffering an almost certain recession, should be relatively resilient and quicker to bounce back.  These factors include the following:

• Notwithstanding our continuing concerns about economic inequality, the consumer's financial health is relatively strong.  The consumer Debt Service Ratio, which measures how much of the consumer's disposable income goes to household debt service payments, is at multi-decade lows.  In addition, savings rates are currently quite high, which means the average consumer has some rainy-day money.
• The consumer is receiving an effective tax cut in the form of mortgage refinancing and very low gas prices. 
• Business investment remains quite depressed.  While relatively low business investment has been a perennial drag on GDP in recent years, that is actually a good thing as it relates to the depth of any downturn. 
• Residential investment's share of GDP also remains below long-term averages.
• The trade skirmishes with China, Europe, Canada and Mexico have held back exports as a share of GDP compared to the levels we expect once trade agreements are firmly in place.
• Business inventories are currently fairly low, which limits the impact of possible inventory draw downs as a response to the crisis.  However, there is good reason to believe companies will actually be building inventories, in many cases, as supply chains are affected by the virus.
• In the near term, the economy will be supported by consumer spending on goods and services (think health care) to protect against the virus or its worst effects.
• Perhaps most obvious, the government is going to go much further into deficits as a result of tax rebates and spending related to the coronavirus.  Though the magnitude is not yet known with certainly, we may be looking at annualized deficits of between $2 and $3 trillion in the initial stages of the response.  A deficit of $2.5 trillion would equate to about 11%-12% of GDP, an amount that would make Keynes blush.  However, these deficits will be required to support the economy in order to prevent a rapid increase in unemployment.  The current super-low level of interest rates should allow the federal government to fund these deficits at a very low cost.  There will be ramifications later for running up this debt, but now is not the time to worry about that. 

There will come a point when investors accept the risk of owning stocks rather than buying bonds that will result in an almost certain loss of purchasing power (because bond yields are below the current rate of inflation).  The current estimate for S&P 500 earnings next year (2021) is still about $190, which puts the current price-to-earnings multiple at just 12.6x. .  If we apply a rather aggressive 30% cut to those estimates, which will clearly be revised down in the coming weeks, the multiple goes to 18x. And importantly, under invested young people are finally getting an opportunity to start saving at lower valuations, which, over time, will result in higher returns.  Investing at lower valuations lowers the cost of saving for retirement, which is one of the consumer's largest expenses - just one more hopeful sign.
 
Hang in there, keep your wits about you, and stay well!   We will get through this together. Please let us know if there is anything we can do for you in these challenging times. 
 
Your friend and financial planner,
Brien

 March 18, 2020

Dear Clients,
 
Thank you again for not panicking! Fear sells! And fear, as an emotion in the markets, is twice as strong on the way down, as greed is on the way up.

Last year in 2019 when the markets were up so high and went up almost the entire year, did any of you say “I don’t like seeing my assets accelerating so much”. So I have included 2 charts (1 chart + 1 graph) below to help you at these very “fearful” times we find ourselves.
The first chart shows how strong the markets recovered once the Epidemic was either cured or a vaccine was found and what percentage the S&P 500 recovered after 6 months or after 12 months beyond that point.
​
The second, or lower of the 2 charts, shows how the MSCI (a world index of stocks) reacted during other epidemics. As you can see, most of the decline in the markets did not last long. Will this time be different? I am not sure, but I doubt it.
 
As always don’t hesitate to contact us with any questions or concerns.
 
Thank you,
Brien

Dear Clients,
 
Thank you, thank you, thank you for being rational, calm, patient and for not over-reacting!
 
Many of you have been with the firm since 1989 and we have been through a lot of these down turns together. I allowed some of you to sell during the “Great Recession” of 2008-2009, and for that I apologize. Those of you who didn’t sell in 2008-2009 came out of that recession in much better shape than those who sold. We also came out of the 2008-2009 time period much more conservative in our investment allocations. We have more cash, more fixed income bonds and more alternative real estate investments that are totally out of the stock or any other markets.  The worst of this pandemic may not be over yet. I will not sugar coat or exaggerate my communications to you. We, at Traditions Wealth Advisors, truly value our relationships with our clients, so why would we take any chances interfering with that trust? We do not have the perfect crystal ball on forecasting the markets, however we do know the long term trends and are constantly educating ourselves on the markets to better help you, our clients. Remember, we are here to help you achieve your goals, we are not here to beat the S&P 500 every day. Thank you again for your patience and understanding during these trying times. I was blessed to have my 20 month old grandson visiting this past week and he reminded me what is important in life—it is long term relationships and long term thinking and investing. Short term thinking and over reacting is not in anyone’s best interest.
 
I have included this chart below to show you and add some perspective that the markets are still higher in the long run, even with the recent down turn. As always, we are here to answer your questions or concerns, do not hesitate to contact us and we will be happy to talk.
 
Thank you and take care from any virus or health concern,
Brien