No charts or graphs today. Definitely no predictions on the bottom of the market. Stocks were automatically halted shortly at the open today because they declined 7% and triggered a circuit breaker. These were put in place to stop panic and downward momentum. It was the first time since 1997 that stocks were halted due to a decline.
And for the first time in history, the entire U.S. treasury yield curve is below 1%. This means that you can’t buy a new treasury bond paying anything worthwhile on any duration from 1-year to 30-years. That is absurd. In turn, existing bond prices have been soaring — although not nearly enough to offset stocks’ downfall.
Will these low rates force investors back to stocks? Retirees looking for yield are not going to get it in bonds right now. Forward-looking returns on bonds are highly correlated to their starting rates. Studies show a roughly 95% correlation and the starting rate right now is 1%. That’s not great.
On the flip side, stocks expected returns increase as their prices drop and they just took a 20% haircut.
The current standing of these two major asset classes is going to affect how we think about diversifying our portfolio allocations moving forward. Much more on this topic at the start of next month.
In the meantime, what do we do?
Should we just sell everything and wait for the dust to settle? The Reformed Broker blog says it best:
“This is the question every financial advisor is getting this week, from at least one or two clients. They’re asking out of genuine curiosity, not just panic or fear. And it’s a great question. The great answer is that you won’t know when the dust settles. There’s no airplane writing the “all clear” in the sky above your neighborhood. And when the dust settles, do you think stocks will be at their lows? Or will they have already rallied furiously, in anticipation of this? Let me give you an example. Today is March 9th. Precisely eleven years ago today, in 2009, the stock market stopped going down. There was no reason. The dust had settled, without fanfare or any sort of official announcement. If you had polled people that day, or week or even month, most would not have agreed that we had seen the worst. The economic headlines were not improving. But there it was. And by June 1st, less than 3 months later, the stock market had climbed 41% from that March low. And even with that having happened, the majority of participants still weren’t clear that the dust had fully settled. That we had, in fact, seen the worst. There were still people calling us 3, 5 and 7 later that had gone to cash and still hadn’t gotten back into stocks. They missed a new record-high a few later, hundreds of percentage points in compounding on their assets.”
These are the times where we have to earn our future returns by enduring the risk that stocks inevitably possess. It’s been a winning bet over time. Gear up.
This post is an excerpt from a private client newsletter on 3/9/2020.