Parrott Wealth Management Weekly Stock Market Update – March 14, 2020.
It was a tough week for global assets. Oil dropped significantly as Saudi Arabia and Russia failed to come to terms with a supply deal. Stocks, bonds, and gold followed suit as they reacted to the Coronavirus news.
Stocks are down more than 21% these past four weeks. The Dow Jones went from a 52-week high to a 52-week low in less than three weeks, the fastest ever.
Thursday, the Dow Jones fell 9.98%, yesterday it rose 9.36%. With wide swings, it’s tempting to try to and trade your way to riches, but I would encourage you to avoid this impulse as most day traders lose money. Historically, 94% of your returns come from your asset allocation; the remainder comes from your investment selection and market timing.
Wall Street is the only marketplace where prices fall, and people panic. If Home Depot had a 25% off sale on appliances, they’d run out of inventory due to the buying demand – not so with stocks.
Here’s how stocks, bonds, and other assets performed this past week.
- The S&P 500 fell 9.35%
- The NASDAQ fell 7.54%
- International Stocks fell 14.32%
- Emerging Markets fell 10.50%
- Long-Term Bonds fell 7.69%
- Gold fell 9.06%
- Oil fell 20.33%
- Chinese Stocks fell 6.20%
We have several investment models ranging from conservative to aggressive, and they’re updated weekly. The models are currently selling bonds to buy stocks because bonds are expensive, and stocks are cheap. We automate this process because humans are almost incapable of buying stocks when they’re low and selling them when they’re high. It’s challenging to buy any investment when it’s falling, especially when everyone is yelling to sell. One of the best ways to create long-term wealth is to buy when others are selling and sell when others are buying.
A few weeks ago, we sold our high-yielding junk bond funds in every model and replaced them with a government inflation-protected bond fund. Junk bonds are down 9.9%, and the government bond fund is down 3.6% for the past month. We’re in the process of selling our long-term bond funds and replacing them with short-term bond funds with maturities of less than one year. Over the past year, our two long-term bond funds, the Vanguard Long-Term Bond Index Fund and the iShares 20+ Treasury Bond ETF are up 20.6% and 29.2%, respectively. A 30-Year bond will fall 25% if interest rates rise 2%. A one-year bond will fall less than 2%. The risk-reward ratio for owning long-term bonds is gone. As a result of the drop in stocks and interest rates, it’s now riskier to own long-term bonds than it is to own shares of great American companies.
Charlie Munger, Warren Buffet’s partner at Berkshire Hathaway, was interviewed by the BBC in October 2009 after the Great Recession when stocks fell 53% and here’s what he said about how much he worries when stocks fall, “Zero. This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
My first full year in the investment business was in 1990, and the Dow Jones Industrial Average fell 4.25% that year; from June to December, it dropped 21%. I was devastated because every stock I bought plunged in price. However, 30 years later, the Dow is up more than 740%. It’s a challenging time for all, but we will recover.
If you want more information, please call me at 512-813-7642.
Have a great weekend.
Bill Parrott, CFP®
President and CEO
Parrott Wealth Management
 https://finance.yahoo.com/news/saudi-arabia-floods-markets-25-152631512.html, by Olga Vagova, March 13, 2020