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7am Saturday

February 29, 2020

Happy leap day!

In case you forgot: A leap day is observed because the Earth’s period of orbital revolution around the Sun takes approximately six hours longer than 365 whole days. A leap day compensates for this lag, realigning the calendar with the Earth’s position in the Solar System; otherwise, seasons would occur later than intended in the calendar year.

What’s Top Of Mind?

In two words: the coronavirus.

Stocks (the S&P 500) had the worst one week drop since 2008 this past week over rising concerns that the coronavirus will impact the global economy. Here’s how the week went…

  • Monday: -3.35%
  • Tuesday: -3.03%
  • Wednesday: -0.38%
  • Thursday: -4.42%
  • Friday: -0.82%

So far, we’ve had a -12.76% drawdown from the all time high set by the S&P 500 on Wednesday, February 20th. This 12.76% drop in 7 trading days is one of the fastest corrections we’ve seen.

What’s not unusual though, is that a 12% drawdown happens almost every year. The % drawdown isn’t even as large as the 19% correction we saw in the 4th quarter of 2018 yet it feels worse because there have been 7 straight down days making up the entire correction so far.

We define a correction as a drawdown of 10% or more and a bear market as a drawdown of 20% or more. This week we entered the 6th correction since the last bear market bottomed in March of 2009. However, it’s not the worst correction we’ve seen over the past decade:

  • 2010: -15.99%
  • 2011: -19.39%
  • 2015: -12.35%
  • 2016: -10.51%
  • 2018: -19.78%
  • 2020: -12.76% (so far)

Is The Panic Selling Justified?

If you look at the facts we’ve seen about the coronavirus (COVID-19) the stock market selloff seems like a big overreaction.

The decline in stocks this week was just as much a function of panic selling over fears of what could happen as it was a reasonable update to the likely trajectory of the economy.

That doesn’t mean selling is over. While a number of indicators would suggest forward returns from current levels should be pretty good, further declines in the near-term cannot be ruled out.

In this environment, investors are best-served by accepting and ignoring volatility, rather than taking it as a signal of inevitably worse outcomes pending.

Here are some things to consider:

+ The economy remains fundamentally strong. Over the past two weeks my view view for the US economy has had very little change. Americans are working, their incomes are rising, and their balance sheets are strong. As a result, the US consumer is in good shape financially and will continue to be a key driver to growth.The job market remains very strong with unemployment at 3.6%

+ The Fed is expected to cut rates by another 0.25% in March.

+ The rate of new cases and deaths in China is slowing.

+ The U.S. stock market has been brought to valuations that look extremely cheap compared with bonds. The dividend yield on the S&P 500 (1.81%) is higher than the yield you can get from a 30-year Treasury bond (1.65%, a record low). With the exception the darkest days in the financial crisis in 2008, this scenario is unprecedented. It is has certainly never been seen when the U.S. stock market is only a matter of days 9 days removed from an all-time high:

My Outlook From Here

An interactive map from Johns Hopkins Center for Systems Science and Engineering allows you to see the spread of coronavirus in real-time. I don’t claim to have any idea how far this outbreak will spread, or how many lives it will claim, before it is brought under control.

However, I know that many of the world’s leading doctors, virologists and epidemiologists are working on treatments and vaccines. I believe that their efforts will ultimately succeed. Clearly, this is just my opinion based on the knowledge and technology we have available. In fact the stock prices of companies working on solutions actually surged last week.

My belief that this is just a temporary probem and setback for the market is also based on the history of similar outbreaks in the past 20 years.

Consider past epidemics like:

  • 2003-2004: SARS, which also originated in China
  • 2005-2006: the bird flu epidemic
  • 2009: a new strain of swine flu
  • 2014: the Ebola outbreak
  • 2016-2017: the Zika virus outbreak

The first day of these 5 epidemics was January 31, 2003 which was the beginning of the SARS epidemic. On that day the S&P 500 closed at 855.70.

17 years and 6 epidemics later (including the current one), yesterday the S&P 500 closed at 2,954.22 points which is nearly 3.5 times higher. The market is resilient and we have recovered from any and all declines from past epidemics.

Like all other viruses in the past I expect that the coronavirus will eventually dissipate.

Bottom Line

This is not a time to panic. Don’t let fear drive your investment decisions. Stay focused on your financial plan. Keep calm and stay invested.

This decline we are going through is within normal ranges of stock market volatility. If history has taught us anything about investing, it’s that declines like these are temporary and the price we have to pay for the long-term premium returns of the stock market.

A Coronavirus Podcast

This past week Josh Robb & Austin Wilson released a fantastic episode on The Invested Dads Podcast where they discuss all things Coronavirus. This podcast episode was dedicated to helping listeners understand exactly what the coronavirus is, the health concerns, the possible solutions, and its impact on the economy & your investments.​
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​Click here to listen to the episode on The Invested Dads website and access the complete show notes.​
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​The show is also available on all major podcast players including Apple Podcasts, Google Podcasts, Spotify, and more.

My Essay on How To Create Wealth

​I wrote an essay about creating wealth.

This originated from a question I’m asked more frequently than any other: “When can I retire?”

I think people are really asking: “How do I create wealth?”

Wealth is “an abundance of valuable material possessions or resources” or having “abundant supply” of something.

Who wouldn’t want to have an abundance of financial resources or an abundant supply of money?

Money is a tool that can be used to buy time. More time = more freedom.

This is how you make work optional. If work is optional, then you can retire if you want to, but you don’t have to. You have options!

However, in your pursuit of building wealth don’t forget that true wealth is about so much more than just money. 💰

True wealth is having an abundant supply of:

  • gratitude for what you already have
  • appreciation for the people & relationships in your life
  • joy & happiness
  • fulfillment from your life’s work
  • faith
  • health
  • money

The key is to focus on progress and the trajectory of your personal growth and habits.

Don’t make the mistake of thinking that wealth is a destination. Becoming wealthy is a journey. Enjoy the process!

​Click here to read my whole essay including the 8 Principles of Wealth Creation.👇

That’s it for this Saturday. Thanks for reading!

Have a great weekend,

Adam

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