Through the years, we have seen many market downturns. From the bear market of 1987 to the economic crisis of 2008-2009, each one has brought its own fears and concerns. In the same way, many investors have concerns about what’s taking place in the market today. In today’s blog, I’d like to take a look at the current downturn and how it compares to those we’ve seen in the past. Follow along as I explore the market downturn and whether this time is different.
Follow Along with The Financially Simple Podcast!
- 01:33 – Ask Justin featuring Chris Steward: Market Volatility
- 02:08 – What is a CFA?
- 05:46 – Is This Market Crash Comparable to 2008/09
- 07:55 – Can it Get Worse?
- 08:35 – Leading Indicators
- 12:30 – Bear and Bull Markets
- 14:27 – Reduction to the Ridiculous
- 17:40 – Time to Buy?
- 20:50 – One Pearl of Wisdom
This Market Downturn…What’s The Difference?
I’ve had a lot of people tell me that this feels a lot like the financial crisis of 2008-2009, and I’ve got to tell you, I just don’t see it. We, in the financial world, like to joke that the scariest thing anyone can say is, “but it’s different this time.” Although it isn’t different most of the time, I believe that this market downturn is different. But why?
If you look at what was taking place back in 2008/09, we were fearful. It seemed that every time the market would begin to stabilize, another major player would go bankrupt. From Lehman Brothers to Charter Communications, the Great Recession saw billion-dollar behemoths filing for bankruptcy and petitioning for government assistance. In their wake, a U.S. economy on the verge of collapse. So what’s the difference between then and now?
Back then, we were very fearful that another AIG or Washington Mutual would file bankruptcy. We went back and changed the capital rules in a way that we aren’t really worried about that type of collapse anymore. On the other hand, our current market downturn is based on an intentional shutdown of the economy designed to slow the spread of coronavirus. In those regards, the current downturn is very different than any we have seen before.
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Leading Indicators – Where Are We Going?
As many of you know, I like to use analogies when describing complex financial concepts. Not only that, but I am an avid outdoorsman, This means that many of my analogies have to do with the outdoor activities that country boys like me, love to do. With that in mind, I like to look at leading indicators as arrows. You see, an arrow is made up of several parts: the tip, the shaft, the fletching, and the nock.
When you shoot an arrow at a target, the tip is the first part of the arrow to make contact with your target. If we view the tip as though it were the market and the fletching as though it were the economy, the market goes ahead of the actual economy and attempts to predict the direction that the economy will go. This is a leading indicator, in a nutshell. Unlike lagging indicators such as the job market, which follows the economy, the leading indicator attempts to predict where the economy will end up.
As a result, the market doesn’t always seem to align with what is currently taking place in the economy. For example, we recently saw the jobless numbers increase and despite this, the market rose. The reason is that the market indicates what we think is about to happen and not what is currently happening.
Defining Bear & Bull Markets
Understanding that this downturn is not like downturns in the past and that the market is a leading indicator in our financial system, is this a bear market or a bull market? What’s the difference? Furthermore, what is the appropriate investor response to these markets?
A general rule of thumb is that a market decline of 20% or more is considered a bear market. On the other hand, if the market improves by 20% or more, it becomes a bull market. The interesting thing is that our current situation has us hovering near the middle, 20% below the market high, and 20% above the market low. What does this mean for today’s investors?
I’ve often quoted Warren Buffett when discussing investments. Known as the Oracle of Omaha, Mr. Buffett famously stated that “when others are fearful, be greedy and when others are greedy, be fearful.” What this means is that if you’re a young investor, this may be a great opportunity to pick up shares in some of your favorite stocks at a discounted price. However, make sure that you’re spreading your investment out across a broad range of positions. Placing all of your eggs in one basket is often a recipe for disaster.
Reductio ad Absurdum
Anytime the weatherman in East Tennessee calls for snow—whether it’s a dusting or two feet—the stores are overrun with locals preparing for the impending snowpocalypse by purchasing all of the bread and milk available. It’s really kind of funny because inevitably, the snow has fallen and melted within about a twelve-hour period. I bring this up to point out another concept in the financial world: “reductio ad absurdum” or reduction of the ridiculous.
Essentially, this is the idea that if we see a half-inch of snow on the ground, we should pack up all of our belongings and move to Florida in order to avoid the coming ice age. Another example of this is the hoarding of toilet paper that we have seen since the pandemic began. Now clearly, we know that a half-inch of snow doesn’t mean that we will all be living in igloos for the rest of our lives. Nor does a stay at home order mean that we need to stockpile 3,600 rolls of toilet paper.
Reduction to the ridiculous is a theory that sounds good but, when taken to its extreme, is actually quite absurd. We have seen this in the past and we are seeing it now when people claim that the market will never recover.
Time to Respond…
Abraham Lincoln once said,
“If I have eight hours to cut down a tree, I’m going to spend seven hours sharpening my ax.“
When it comes to investing, one of the most crucial keys to success is to come up with a plan. Once you’ve created your investment plan, FOLLOW IT!
Although we are in a market downturn, we are also in unprecedented times. Since we cannot give advice about your specific situation, we highly recommend that you reach out to your financial advisor to discuss your concerns. If you don’t already have an investment strategy in place, work with your advisor to create one. If you don’t have an advisor, the team at Heritage Investors is here to help!
Have questions about whether your portfolio is set up to withstand the downturn? We’re here to assist you in whatever way we can. Schedule a call with one of our seasoned professionals today!