It was a very a difficult week. As the uncertain trajectory of COVID-19 upsets both public health systems and financial markets, we see how dramatically unexpected events can affect us. Coronavirus and its economic fallout, coupled with the Saudi/Russia oil tension, have created a unique mix of anxiety that makes markets particularly volatile.
We cannot know, nor can anyone, what will happen over the short term, but we have confidence, based on past experience, that world and U.S. markets are resilient over the longer term. Unlike the Global Financial Crisis in 2008, where the drivers were fundamental economic and structural issues with financial systems, the current, and rapid, event-driven drop we’re experiencing is strongly linked to fear of the disruption of coronavirus. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Eventually investors are rewarded by staying in the market and bearing that risk, and it often does not take very long, as the chart shows.
We plan for market swings, even very dramatic ones, as we develop portfolios and financial plans. We expect that the weeks and possibly months ahead will continue to be unsettled as the anticipated spread of coronavirus continues. We know you are well-versed that history has shown no reliable way to identify a market peak or bottom, and this is why we advise against actions based on fear or speculation, even as difficult and traumatic events transpire. We are taking advantage of opportunities for tax loss-harvesting and rebalancing of long-term portfolios.
You may find it encouraging that the near-30% stock market drop experienced so far, added onto the 11-year bull market that preceded it, would still equate to a 9.4% annualized return, which is still several percent above the projected returns used in our client planning. In other words, stock valuations have been inflated, and a portion of this fear-driven selling is bringing long-term cumulative returns back within the expected range.
For our part, The Advisory Group has structures in place to ensure that that our client service is uninterrupted. We will continue to follow CDC and state directives to promote social distancing and are regularly sanitizing our workplace. We have long had contingency plans in place for remote work, and for our clients who prefer not to meet in person, we can offer video meetings.