The Coronavirus Bear kicked the 11-year Bull Market of Wall Street very fast. A “bear market” occurs when stock prices in general are falling, and then widespread pessimism sustains the continued drop in prices. The stock market becomes a bear market whenever stock prices have fallen over 20% over the course of several months, as seen in market indexes like the S&P 500. Investors lose confidence in the market as they anticipate further losses.
A “bull market”, on the other hand, comes with rising stock prices and increasing investor confidence. Stock prices rise by at least 20% over the course of several months in a bull market. Looking at history, bear markets are typically shorter than bull markets. A bull market's average duration is about 3 years, while bear markets last on average about 18 months. The terms, “bear market” and “bull market,” come from the behaviors of these animals: A bull thrust its enemies upward, while a bear prefers to knock foes into the dirt. Stock Market Corrections It is important to distinguish a bear market from a market correction, which is shorter and involves less of a market decline. Market corrections are part of the normal ebb and flow of the market. They are short-term trends that typically last less than two months and involve stock market declines of about 10% - not the 20% fall in a bear market. Stock market corrections are a natural part of the stock market cycle. Stock Market Crashes Stock markets “crash” when stock prices plummet more than 10% in one day. The Great Crash of 1929 consisted of market drops of 13% and 12% on successive days. On March 16, 2020, the market crashed 13%. Bear Market Rally In a normal bear market, there will of course be days or weeks when prices increase. It is important, however, to distinguish a bear market rally from the beginning of a bull market. In a rally, the stock market posts gains for days or even weeks in a row. Investors might be tricked into thinking that a new bull market has begun. However, until stock prices increase by 20%, there is still a bear market. Recessions A recession occurs when the Gross Domestic Product (GDP) declines for two or more quarters in a row. Many of the same factors cause recessions and bear markets, but the stock markets and the economy do not always move together. Usually, however, a bear market and a recession overlap. Historical Bear Markets: Great Crash of 1929 (89% drop, 34 months) The depression was preceded by the Great Crash of October, 1929, with price declines of 13% and 12% on successive days. The crash also inaugurated the worst bear market of all time, with stocks dropping 89% through June, 1932. High unemployment lasted through the 1930s. Vietnam & Assassinations of 1968-1970 (36% drop, 18 months) A weakening economy, high inflation, a tumultuous year of assassinations and riots, and tensions of the Vietnam War influenced the development of a bear market, which accompanied a mild recession. Oil Embargo of 1973-1974 (48% drop, 21 months) The 1970s were marked by chronically high inflation. Stocks also underperformed during the decade, rallying and then fading in value. In 1973, the Arab oil embargo drove up gas prices, sparking double-digit inflation, a recession, and a bear market. Interest Rate Rise in 1980-1982 (28% drop, 21 months) By 1980, the country had faced almost a decade of sustained inflation, along with slow growth. In order to fight this “stagflation,” the Federal Reserve raised interest rates. This rate increase, coupled with a deep recession, led to a relatively shallow bear market lasting 21 months. Crash of 1987 (34% drop, 3 months) Due in large part to the excesses of automated computer trading, the market crashed, falling 22.6% in one day. The resulting bear market lasted only a brief 3 months. The GDP did not fall, so there was no recession. Dot.com Bubble of 2000-2002 (49% drop, 30 months) The Dot.com bubble consisted of soaring stock prices and excitement about newly emerging Internet companies. The bubble burst when investors realized that the newly emerging Internet companies showed little or no profit. The attacks of 9/11 deepened a mild recession and prolonged this bear market. Subprime Mortgage & Financial Crisis of 2007-2009 (56% drop, 17 months) A rising mortgage delinquency rate spilled over into the credit markets because a variety of financial instruments were tied to home loans. As a result, the U.S. and other countries enacted large economic stimulus measures. It was accompanied by the “Great Recession.” The Coronavirus of 2020 (30%+ drop, TBD) The pace with which the bear kicked the bull off of Wall Street was startling, as markets were setting record highs as recently as mid-February 2020. In fact, the speed with which the bear awakened from its 11-year slumber was the fastest in history. Volatility was rampant, the NYSE’s circuit breakers kicked on multiple times and the U.S. government rushed through aid packages worth over $1 trillion. Trends and Predictions Bull markets feature investor optimism, but this turns to pessimism and panic during a bear market. Both types of markets are driven by changes in investor attitudes as much as by economic fundamentals. A bear market is difficult to predict. Falling stock values might just be part of a stock market correction. Rising values might only signal a bear market rally, as opposed to a new bull market. Investors need to beware of the tendency to overreact to fears of a bear market or thrills of a bull market. Investors tend to tinker with their holdings, often selling after stocks have fallen sharply, instead of buying stocks at low prices (or buying after stocks have risen to unsustainable heights). Similarly, some investors sell stocks before the bear market begins but are then too frightened to return. Many factors affect the stock market. The depression was preceded by the Great Crash of October, 1929, with price declines of 13% and 12% on successive days. The crash also inaugurated the worst bear market of all time, with stocks dropping 89% through June, 1932. High unemployment lasted through the 1930s. The pace with which the bear kicked the bull off of Wall Street was startling, as markets were setting record highs as recently as mid-February 2020. In fact, the speed with which the bear awakened from its 11-year slumber was the fastest in history. Volatility was rampant, the NYSE’s circuit breakers kicked on multiple times and the U.S. government rushed through aid packages worth over $1 trillion. Trends and Predictions Bull markets feature investor optimism, but this turns to pessimism and panic during a bear market. Both bull and bear markets are driven by changes in investor attitudes as much as by economic fundamentals.
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"The unfortunate truth is that intelligence and experience in one domain do no necessarily translate to another domain. More importantly, IQ tests do not assess whether a person is rational. Someone can have a very high IQ and yet not be very rational. A high-IQ individual may also not have well developed skills, such as judgment and decision making." - Tren Griffin. In fact, having a high-IQ may lead to over-confidence and not understanding where your circle of competence ends.
"A lot of people with high IQ's are terrible investors because they've got terrible temperaments." - Charlie Munger, Vice-Chairman of Berkshire Hathaway. Charlie also said, "Very-high-IQ people can be completely useless-and many of them are." An old joke about Albert Einstein illustrates this point, Einstein passed away and went to heaven where he was informed that his room was not ready yet. He was told by an angel who was responsible for new arrivals, “I hope you will not mind staying for a while in a dormitory, I’m sorry but this is the best we can do right now.” The angel then escorted Einstein to meet his roommates saying this is your first roommate, she has an IQ of 180. “That’s wonderful!” exclaimed Einstein, “we can discuss mathematics.” The angel then said here is your second roommate his IQ is 150, “That’s wonderful,” responded Einstein, “we can discuss physics,” The angel finally said here’s your third roommate his IQ was 100. “That’s wonderful, where do you think the stock market is headed?” Being humble and thinking your IQ is a bit lower than it actually is may in fact improve your investment success. This blog is written from ideas from Tren Griffin's book, "Charlie Munger, The Complete Investor" -Paul R. Rossi, CFA Never bet against America and more sage advice from the Oracle of Omaha
Warren Buffett, one of the most successful and admired investors of our time, held the 2020 Berkshire Hathaway Annual Meeting of Shareholders from the company’s Omaha, Nebraska headquarters on the first Saturday of May. The Berkshire Annual Meeting, which has become an annual Woodstock-like event for investors around the world, drew a record 40,000 visitors last year, but this year (2020) the event was live-streamed instead due to COVID-19. And the Meeting was also limited to 89 year old Buffett holding court without his 96-year old friend and colleague Charlie Munger, who did not attend given the stay-at-home orders. But the almost 5-hour event, even without the fans, did not disappoint. Buffett’s presentation covered a lot of ground, including the performance of Berkshire Hathaway, the airlines, stock buybacks, succession plans, cash positions, the coronavirus, the federal government’s response, his office attire during the shutdown (sweatpants) and America’s prospects going forward. Here are just a few takeaways from the Oracle of Omaha. Buffett Dumped All Airline Stocks Before the Annual Meeting, there was a lot of chatter about Berkshire’s selling of airline stocks in April – positions Berkshire started making in late 2016. In fact, Berkshire held 10.1% of Southwest, 10% of American, 9.2% of Delta and 7.6% of United as of December 31st. And he sold all of it.
High Regards for the Federal Reserve Chair As has been well documented, since early March the Federal Reserve has taken bold and drastic actions to combat COVID-19, with many suggestions that such drastic actions have not been taken by the Fed since the Great Financial Crisis of 2008. In all, the Federal Reserve’s actions have provided the bulk of the more than $6 trillion worth of liquidity to our financial system because they adopted:
Here is what Warren said about the Fed and its current Chairman, Jerome Powell:
“Never Bet Against America” That is not a pithy title, those are the exact words spoken by Buffett when asked about the impact of COVID-19. And he had a lot more to say. He acknowledged that the range of possibilities are wide and it will likely take years before investors truly understand the full impact of the virus, from an economic perspective but also from an emotional perspective. But he left no doubt that the markets would regain their footing, especially in the U.S. On comparing the current virus to the Financial Crisis of 2008:
On whether America will rebound:
Heading into your retirement years brings a slew of new topics to grapple with, and one of the most confusing may be Medicare. Figuring out when to enroll, what to enroll in and what coverage will be best for you can be daunting. To help you wade easily into the waters, here are 8 essential things you need to know about Medicare. Medicare Comes with a Cost Medicare is divided into parts. Part A, which pays for hospital services, is free if either you or your spouse paid Medicare payroll taxes for at least ten years. (People who aren't eligible for free Part A can pay a monthly premium of several hundred dollars.) Part B covers doctor visits and outpatient services, and it comes with a monthly price tag -- for most people in 2017, that monthly cost is about $109. New enrollees pay $134 per month. Part D, which covers prescription drug costs, also has a monthly charge that varies depending on which plan you choose; the average Part D premium is $34 a month. In addition to premium costs, you'll also be subject to co-payments, deductibles and other out-of-pocket costs. You Can Fill the Gap Beneficiaries of traditional Medicare will likely want to sign up for a Medigap supplemental insurance plan offered by private insurance companies to help cover deductibles, co-payments and other gaps. You can switch Medigap plans at any time, but you could be charged more or denied coverage based on your health if you choose or change plans more than six months after you first signed up for Part B. Medigap polies are identified by letters A through N. Each policy that goes by the same letter must offer the same basic benefits, and usually the only difference between same-letter policies is the cost. Plan F is the most popular policy because of its comprehensive coverage. A 65-year-old man could pay from $1,067 to $6,772 in 2017 for Plan F depending on the insurer, according to Weiss Ratings. There Is an All-in-One Option You can choose to sign up for traditional Medicare -- Parts A, B and D, and a supplemental Medigap policy. Or you can go an alternative route by signing up for Medicare Advantage, which provides medical and prescription drug coverage through private insurance companies. Also called Part C, Medicare Advantage has a monthly cost, in addition to the Part B premium, that varies depending on which plan you choose. With Medicare Advantage, you don't need to sign up for Part D or buy a Medigap policy. Like traditional Medicare, you'll also be subject to co-payments, deductibles and other out-of-pocket costs, although the total costs tend to be lower than for traditional Medicare. In many cases, Advantage policies charge lower premiums but have higher cost-sharing. Your choice of providers may be more limited with Medicare Advantage than with traditional Medicare. High Incomers Pay More If you choose traditional Medicare and your income is above a certain threshold, you'll pay more for Parts B and D. Premiums for both parts can come with a surcharge when your adjusted gross income (plus tax exempt interest) is more than $85,000 if you are single or $170,000 if married filing jointly. In 2017, high earners pay $187.50 to $428.60 per month for Part B, depending on their income level, and they also pay extra for Part D coverage, from $13.30 to $76.20 on top of their regular premiums. When to Sign Up? You are eligible for Medicare when you turn 65. If you are already taking Social Security benefits, you will be automatically enrolled in Parts A and B. You can choose to turn down Part B, since it has a monthly cost; if you keep it, the cost will be deducted from Social Security if you already claimed benefits. For those who have not started Social Security, you will have to sign yourself up for Parts A and B. The seven-month initial enrollment period begins three months before the month you turn 65 and ends three months after your birthday month. To ensure coverage starts by the time you turn 65, sign up in the first three months. If you are still working and have health insurance through your employer (or if you're covered by your working spouse's employer coverage) you may be able to delay signing up for Medicare. But you will need to follow the rules, and must sign up for Medicare within eight months of losing your employer's coverage, to avoid significant penalties when you do eventually enroll. A Quartet of Enrollment Periods There are several enrollment periods, in addition to the seven-month initial enrollment period. If you missed signing up for Part B during that initial enrollment period and you aren't working (or aren't covered by your spouse's employer coverage), you can sign up for Part B during the general enrollment period that runs from January 1 to March 31 and coverage will begin on July 1. But you will have to pay a 10% penalty for life for each 12-month period you delay in signing up for Part B. Those who are covered by a current employer's plan, though, can sign up later without penalty during a special enrollment period, which lasts for eight months after you lose that employer coverage (regardless of whether you have retiree health benefits or COBRA). If you miss your special enrollment period, you will need to wait to the general enrollment period to sign up. Open enrollment, which runs from October 15 to December 7 every year, allows you to change Part D plans or Medicare Advantage plans for the following year, if you choose to do so. (People can now change Medicare Advantage plans outside of open enrollment if they switch into a plan given a five-star quality rating by the government.) Costs in the Doughnut Hole Shrinking One cost for Medicare is decreasing -- the dreaded Part D "doughnut hole." That is the period during which you must pay out of pocket for your drugs. For 2017, the coverage gap begins when a beneficiary's total drug costs reach $3,700. While in the doughnut hole, you'll receive a 60% discount on brand-name drugs and a 49% federal subsidy for generic drugs in 2017. Catastrophic coverage, with the government picking up most costs, begins when a patient's out-of-pocket costs reach $4,950. You Get More Free Preventive Services Medicare beneficiaries can receive a number of free preventive services. You get an annual free "wellness" visit to develop or update a personalized prevention plan. Beneficiaries also get a free cardiovascular screening every five years, annual mammograms, annual flu shots, and screenings for cervical, prostate and colorectal cancers. -Paul R. Rossi, CFA You hear it all the time: you should make sure your retirement savings at least keep pace with inflation. But what is Inflation and how does it really affect your retirement savings? Let’s explore. In simple terms, Inflation is an increase in the general level of prices for goods and services. Deflation, on the other hand, is defined as a decrease in the general level of prices for goods and services. Example and some history: If inflation is high, at say 10% – as it was in the 1970s – then a loaf of bread that costs $1 this year will cost $1.10 the next year, and $1.21 two year from today. Inflation in the United States has averaged 3.29% from 1914 until 2016, but throughout history, it's varied quite a bit. It reached an all-time high of 23.70% in June 1920 and a record low of negative -15.80% in June 1921. Some will remember the high inflation rates of the 70s and early 80s when inflation hovered around 6% and occasionally reached double-digits. For comparison purposes, the inflation rate in Venezuela averaged 32.47% from 1973 until 2017, reaching an all-time high of 800% in December of 2016. So needless to say, Inflation around the world can and does vary dramatically. So how does Inflation affect your Retirement Account? The simple answer is: inflation decreases the purchasing power of your money in the future. Consider this: at 3% inflation, $100 today will only be worth $67.30 in 20 years, a loss of 1/3 its value. Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well your $100 will be reduced to just $34.44. Think back to many good or services you paid for some years ago, and I bet you can say, "I remember when..." For me personally, I remember purchasing a gallon of gas for well under $1 per gallon in high school. How is Inflation calculated? Every month, the Bureau of Labor Statistics calculates indexes that measure inflation:
How the Federal Reserve Attempts to Control Inflation Up until the early part of the 20th century, there was no central control or coordination of banking activity in the United States. In fact, the US was the only major industrial nation without a central bank until Congress established the Federal Reserve System in 1913 with the enactment of the Federal Reserve Act. With the Federal Reserve Act, Congress set three very specific goals for the Fed:
These three goals are sometimes referred to as the Fed's "mandate." In order to help the Fed stabilize prices, Congress gave the Fed a very powerful tool: the ability to set monetary policy. And one way the Fed sets monetary policy is by manipulating short-term interest rates in an effort to control inflation. If the Fed believes that prevailing market conditions will increase inflation, it will attempt to slow the economy by raising short-term interest rates – reasoning that increases in the cost of borrowing money are likely to slow down both personal and business spending which therefore slows down the pressure for good and services, thus lowering inflation. The flip side is true too: if the Fed believes that the economy has slowed too much, it will lower short-term interest rates in an effort to lower the cost of borrowing and stimulate personal and business spending. As you might imagine, the Fed walks a very fine line. If it does not slow the economy soon enough by raising rates, it runs the risk of inflation getting out of control. And if the Fed does not help the economy soon enough by lowering rates, it runs the risk of the economy going into recession. Currently, the Fed believes that “inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Fed’s mandate for price stability and maximum employment.” What Investors Need to Remember Therefore, it is imperative that your long-term retirement strategies account for inflation and that you prepare for a decrease in the purchasing power of your dollar over time. As a financial advisor, I would suggest you assume inflation will be approximately 3%, its historical average. So in other words, your investment portfolio needs to AT LEAST cover the "cost" of Inflation or earn a rate of return equal to or greater than inflation. It’s true that inflation today hovers around 2% – the Federal Reserve’s target inflation rate – but I would prefer to use the last 100-years of data. If I’m wrong and we find that the inflation rate for the next 25 years turns out to be 2%, then the purchasing power of your retirement savings will be more, not less. And I’d rather err on the side of caution. -Paul R. Rossi, CFA Now more than ever, understanding how you are invested in your Retirement account(s) is critical.
We use several powerful platforms to review, analyze, diagnose, and improve our clients portfolios to optimize for the greatest amount of return for the least amount of risk. The nice thing about being an investor is that the forces that drive the markets change all the time. However, there are different “market regimes” in which a major narrative dominates market action. Over the last 20 years of my career, there have been several ascendant market narratives: technology companies revolutionizing the world, followed by the “jobless recovery” of the early 2000's, and then the “Great Moderation” a few years later. Suddenly in 2007, we all had to become experts in housing and mortgage markets as subprime mortgages blew up the world. Then it was back to central bankers and such unconventional monetary policy as quantitative easing (QE) and “Operation Twist” that created a “new normal.” Then came the European debt crisis and austerity, which was replaced in recent years by geopolitics and the rise of populism. And while I am generally skeptical that individual geopolitical events will have a listing influence on financial markets, there are clearly circumstances — the US–China trade tensions or Brexit, for example — that can and do have a material influence on investments. The challenge then is how to forecast these events and their impact. For forecasting rules, the gold standard is described in Dan Gardner and Philip Tetlock’s Superforecasting — a mandatory read for anyone who forecasts. But there are other great resources, including Steve LeVine's 14 rules. Personally, I have created my own set of 10 rules that I try to use as guidance when forecasting economic or political events: 1. Data matters We humans are drawn to anecdotes and illustrations, but looks can be deceiving. Always base your forecasts on data, not qualitative arguments. Euclid’s Elements was one of the earliest texts on geometry, yet none of its oldest extant fragments include a single drawing.
Predicting the next financial crisis will make you famous if you do it at the right time. It will cost you money and reputation at all others. Remember that there are only two kinds of forecasts: Lucky and wrong. 3. Reversion to the mean is a powerful force In economics as well as politics, extremes cannot survive for long. People trend toward average, and competitive forces in business lead to mean reversion. 4. We are creatures of habit If something has worked in the past, people will keep doing it almost forever. This introduces long-lasting trends. Don’t expect them to change quickly even with mean reversion. It is incredible how long a broken system can survive. Just think of Japan. 5. We rarely fall off a cliff People often change their habits in the face of a looming catastrophe. But for that behavioral change to occur, the catastrophe must be salient, the outcome certain, and the solution simple. 6. A full stomach does not riot Revolutions and uprisings rarely occur among people who are well fed and feel relatively safe. A lack of personal freedom is not enough to spark insurrections, but a lack of food or water or widespread injustice all are. The Tienanmen Square protests in China were triggered by higher food prices. So too was the Arab Spring. 7. The first goal of political and business leaders is to stay in power Viewed through that lens, many actions can easily be predicted. 8. The second goal of political and business leaders is to get rich Combined with the previous rule, this explains about 90% of all behavior. 9. Remember Occam’s razor The simplest explanation is the most likely to be correct. Ignore conspiracy theories. 10. Don’t follow rules blindly This applies to these rules as well as all others. Here is a link to the original article by Joachim Clement, CFA The above article is copied from the original. -Paul R. Rossi, CFA Just Plan Critical for long-term success, your financial plan doesn't need to be complicated, but it should provide a starting point and create a baseline for measuring your goals and determining what’s most important to you. Just Cut Fees Physically review all financial statements (bank, brokerage, retirement, etc.), bills (home & auto insurances, utility, etc.), and subscription services (gym memberships, streaming services, internet providers, phone contracts, etc.) to uncover fees that you can eliminate or reduce. There's no excuse not to now...most of us are at working from home due to COVID-19. Find the time to spend just a few minutes which could end up saving you hundreds if not thousands of dollars every year. Just Budget You have to know exactly how much you need per month to live. The easiest way to create a budget is to track what you earn, save and spend. Keep it simple...but accurate. Do it. Just Invest Invest to earn a rate of return greater than inflation. Consider low-cost, broad-based index funds to diversify holdings, reduce management expenses and mitigate tax consequences. Just Plan for Retirement It's never too early (or late) to start saving for life after work. Make regular contributions to retirement accounts, like 401(k) plans, for tax deferred growth. Just Eliminate Debt Reduce or eliminate debt whenever possible - you'll find it easier to achieve your goals without having debt hanging around your neck. You'll sleep better too. Just Look Monitor your brokerage statements and 401(k) account to ensure you are on track for retirement. It is always a good idea to overestimate your needs. Expect the unexpected, plan for and invest for recessions to be part of our future. Why? Because they are. Having a solid financial plan can weather the toughest storms. According to reports from CNBC, 75% of Americans are going it alone, without the help of a financial advisor. To achieve their goals, everyone should have a financial advisor. But not just any advisor – a good one, and the right one for you. Just Relax We will get through this. We will. Just Appreciate Appreciate everything that is right in your life. Appreciate the people in your life. Appreciate the little things. Appreciate the big things. Appreciate your struggles...it's during challenging times that you can grow and become the best version of you. NOW GO OUT AND JUST DO IT. |