This Too Shall Pass
First, for some context. Recently the World Health Organization declared the coronavirus outbreak a global pandemic after the spread of the virus reached Europe and now North America. While few of us have seen a situation like this, it is not unprecedented. For the last several weeks I’ve been reading and researching the impact that different pandemics had on society. In the spring of 1957, the Asian Flu emerged and lead to outbreaks across the Northern Hemisphere. Like what we are seeing today, the Asian Flu spread mostly through person to person contact in large group settings. Government officials were put in the position of canceling large events in the interest of public health, just as they are today. This will undoubtedly have impacts on our national and local economies, but we’ve already seen creative legislative proposals making their way through congress that attempt to ameliorate some of the economic impacts that accompany some of the necessary social distancing measures currently being implemented. If we look back to what the market did in 1957, the picture is what we might expect, markets were down significantly. But by the end of 1958, markets had not only recovered but had increased by 20% relative to the beginning of 1957. This should serve as a reminder that “This too shall pass.”
In situations of extreme uncertainty, the immediate question becomes “What does this mean for me?” While stocks are falling, the bond funds that Baker Boyer uses in client portfolios are performing very well and exactly how we would expect them to. In client meetings, I often show clients a Monte Carlo simulation that roughly approximates the confidence clients should have that their portfolios will meet their needs over time. By having an exposure to bonds and cash during this time period, we effectively increase the resiliency of client portfolios in severe drawdowns. Our trading team is also being directed to raise money for living expenses and withdrawals from bonds and cash to mitigate what’s called “sequence of returns” risk. Sequence of returns risk is the concept that being a forced seller of volatile assets in volatile times has a disproportionately negative impact on client portfolios.
In situations of extreme uncertainty, the immediate question becomes “What does this mean for me?”
I’ve talked a bit about how markets have responded in the past and how Baker Boyer is managing our clients’ portfolios, but in situations like the one we find ourselves in, I think it’s important to highlight some things that you as an individual control when it comes to your finances. One of the biggest variables within all our control is our behavior. By behavior, I mean not only as it pertains to our decisions within our portfolios, but also our spending behavior. With the implementation of social distancing measures, it’s safe to say that many of our discretionary spending decisions will almost be made for us. With likely decreased spending in travel, entertainment, and dining out our social lives will change, but with that changes also comes a decrease in the spending requirements that our portfolios need to support. For those individuals who are still employed and looking for timelier and short-term resources, the Washington State Department of Financial Institutions has published some personal finance resources that might be helpful. You can find those resources here.
With the implementation of social distancing measures, it’s safe to say that many of our discretionary spending decisions will almost be made for us.
In closing, remember that this isn’t the first pandemic that the United States, Washington state, or even Baker Boyer has dealt with. In the short term, our lives will undoubtedly change in ways that we may have never thought possible, but our ability to think calmly and make prudent decisions will carry us through. This too shall pass.