COVID-19 Update No.2

Most people are feeling some degree of discomfort with their lives at present, and “Peak COVID-19” isn’t expected until April/May.  Whilst current global events hopefully won’t persist for long, the uncertainty permeating through financial markets and the day to day lives of every household is a trial.

Whilst widespread COVID-19 infection is largely unavoidable, delaying the spread can ensure hospitals aren’t overwhelmed.

In 1918 when the Spanish flu was rampant, the city of Philadelphia threw a parade that drew 200,000 spectators.  Three days later, every bed in their hospitals was filled with sick and dying patients.

In St.Louis, just 900 miles away, the city closed schools, playgrounds, libraries, courtrooms and even churches within two days of the first infections.  Public gatherings of more than 20 people were banned.  The graph below shows how St.Louis were able to “flatten the curve” and ensure its hospitals could better cope with the Spanish flu[i].

It’s worth noting in the graph above the timeframe is 3 months, but also how the article stated no single intervention showed an association with improved aggregate outcomes, which means multiple measures are required, and need to be maintained, to reduce transmission.

We all have a role to play in helping the community to flatten the curve.  In coming days we will contact every client we have a planned meeting with over the next month to give people options on how we proceed. If we do go ahead with plans to meet in our office, please just advise and reassure us that you are aware of and adhering to any and all government protocols and announcements on self-quarantining, as indeed we are.

We each have a role to play too in dealing with the financial impact of COVID-19.

The role of the team at Stewart Partners includes preparing each client to deal with inevitable market volatility, whatever the cause.  The role of each client is to maintain their discipline.  Despite what is happening in the world, your long-term goals haven’t changed, and your financial plan was created around these goals. There is no need to react on a minute-by-minute basis to our 24-hour news cycle.

On this basis, we score our clients collectively as A+ for their disciplined behaviour over the past few weeks.

We prepared for market volatility in how we developed a target asset allocation for each client.  This is important because we know stockmarkets are inherently volatile.  Over the past 35 years, in 25 of the years (or 70% of the time) there was an intra-year market drop of 10% or more.  Despite this, in 26 out of 35 years the market posted positive gains for the year.

If we look back to 1926 in the US stockmarket (the most data available globally), we can see further proof of how volatile markets can be over the short-term.  Whilst the average return of the S&P 500 Index was 12.1% p.a, only 7 out of 94 calendar years had a return with a 2% range of the average (being 14.1% to 10.1%).  If we look at how many calendar years had a return of +20% or higher, or -20% of lower, the answer is 42 periods (or 45% of the time).

Period 1 January 1926 to 31 December 2019. Annual calendar year returns shown. Source Returns Program

This information reaffirms that market volatility is normal.  To act surprised and react to short-term market volatility is a folly.  Imagine if you’d missed out on the US market rallying 9.4% in last Friday’s sessions?

The universal acceptance of the value of a company is its future discounted cashflows. Consequently, whilst there will be an inevitable interruption to many of these cashflows, the majority of company share prices will rebound. For investors this requires confidence, stickability and patience.

For every seller, there must be a buyer. 

When the market falls, some people decide they can’t take the pressure and decide to sell.  On the other side of that same transaction is someone who thinks it’s a great time to buy.  For many of our clients with capacity and long-term time horizons, the past few weeks have proven an opportune time to rebalance portfolios and invest in the stockmarket.  We can’t tell them exactly when they’ll reap the benefits of their investment decisions, but they most likely will.

Down the road, our collective efforts are designed to minimise the impact on clients’ lifestyles.

Author: Rick Walker

[i] https://qz.com/1816060/a-chart-of-the-1918-spanish-flu-shows-why-social-distancing-works/