Coronavirus & the Dow Down 1000+ Points: Time to Panic?

The new coronavirus, dubbed COVID-19, has led to 80,000 infections and over 2600 deaths since originating in Wuhan, China in December 2019. This outbreak which the World Health Organization (“WHO”) has said is a “public health emergency of international concern” is a true human tragedy. Pretty scary at first glance, but taken in context it’s not so different from the normal flu. According to Centers of Disease Control, this season through February 7, more than 19 million people just in the US had caught the flu of which 10,000 died from it.

While the flu is caused by any of several different types and strains of influenza viruses, COVID-19 is caused by one virus, the novel 2019 coronavirus, now called severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2.  When looking at the symptoms of COVID-19, we find that they are similar to that of the influenza (flu) virus, i.e. cough, runny nose, sneezing, sore throat, fever, headache, etc. Symptoms for both COVID-19 and the flu can be mild or severe and can result in pneumonia which can lead to death. According to WHO, the infection has been fatal in 2-4% of cases within Wuhan, but in less than 1% elsewhere. Rates go up for the elderly and those without sophisticated health care providers. Again, pretty similar to the normal flu.

Both COVID-19 and the flu can be spread from person to person through droplets in the air from an infected person sneezing, coughing, or just talking. Neither virus is treatable with antibiotics. Good news is that there has been promising work in the drug and vaccine space against COVID-19 but those need to be tested. Prevention methods for both include frequent, thorough hand washing, staying home when sick and limiting contact with those infected.

It’s still unclear as to how this situation will unfold and how much spreading of COVID-19 will take place. Fortunately, the immediate health risk for the general American public is low at this time. Further, it appears that China is getting the disease under control as the pace of infections (as represented by the “daily tally of new cases”) peaked a few weeks ago and has since steadily declined. However, reports over the weekend showed that the coronavirus is not only just appearing in other countries but unfortunately accelerating in some like Iran, South Korea, and Italy. The Italy news has many worried that Europe could be in the first innings of the ballgame China has been stuck in.

We’ve talked before how the stock market doesn’t like uncertainty and a virus like this only compounds that. We know in China that business has been severely affected. Not only are people avoiding going out to the movies and having fun outside, they’ve been told to stay home to stop further contagion. Most factories have basically been shut down since the Lunar New Year. These Chinese factories help produce many goods needed by world-wide manufacturers. If XYZ Company in Canada can’t get that one particular China-made good that goes into its finished project, it’s stuck in limbo until things clear up. Thus, we basically have a global supply-side shock in the making. Not good for the global economy! And don’t forget that China now accounts for 15% of the whole world GDP. Talk about ripple effect!

The odd thing that happened is that when COVID-19 gained notoriety in January, the US stock market sold off only to quickly recover and just recently was trading at record highs. The market shrugged off the bad news, putting it into the “one-time” event category or figuring that the global central banks would turn more dovish on rates and thus come to the rescue.

But the weekend news about Iran, South Korea, and Italy as well as the warning that an extended Chinese shutdown could cost the world up to $1 trillion in lost output, brought the fear back. Which led to the DOW’s worst trading day in two years, down over 1000 points yesterday!

So is it time to panic? Of course not.

COVID-19 is a terrible disease outbreak. Unfortunately, it’s not the first and it won’t be the last. We’ve seen this happen before; just think of the following: Ebola, Zika, Swine Flu, SARS. Let’s take a look at the market reaction to some of these:

Market reacts during virus outbreaks

The stock market sold off in all of these cases indeed. But more importantly is to see how the market recovered.

market heals after disease outbreak

As you can see, in most cases, the market typically recovers within six months.

We come back to our old saying of: control what you can control and don’t get emotional from the things you cannot.

Moreover, don’t let short-term market events alter your long-term planning. Unfortunately, humans are not wired for disciplined investing and usually trade poorly based on fear. So avoid that mistake by staying invested and staying disciplined and focusing on things that can be controlled:

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a well-balanced, diversified portfolio
  • Reduce expenses through low turnover and via passive investments where available
  • Minimize taxes by using asset location, tax loss harvesting, etc.
  • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points
  • Stay Invested

If you’d like to further discuss how disease outbreaks affect your portfolio and/or long-term financial planning, don’t hesitate to contact us.

 

https://dwmgmt.com/

The F-Word (Fiduciary) is Becoming the Antidote

Fiduciary: n. from the Latin fiducia, meaning “trust.”  For Registered Investment Advisers, the legal obligation to always put their clients’ interest first and be proactive in disclosure of any potential conflicts of interest.

Contrast that with a commissioned salesperson.

When you buy a car you know that the salesperson is going to earn a commission.  You know the salesman is there to sell you a car at the highest price you’ll accept and then try to get you to sign up for extras.  It’s your job to do your homework beforehand; know what you need and can afford, and then fight for the best deal you can.  Caveat emptor– buyer beware.

Unfortunately, in the arena of financial services it’s also caveat emptor.  You may think that the commissioned salesperson is there to help you.    They may call themselves “financial consultant,” financial advisor,” or “financial planner,” and may have a business card with some interesting initials or designation as a V.P.  Regardless, if they are paid commission, they are generally focused on selling you products that are best for them and their employer, not you.  There is a fundamental conflict of interest that works against you.  Often the highest commissioned products include large upfront and/or ongoing fees to recoup the big commissions.  The future performance of your investments is diminished dollar for dollar for these excessive fees.

In the 1980s and 1990s, when economic growth and higher inflation pushed equity returns into annual double digit returns, high fees might have been overlooked.  But, when today’s lower growth and inflation produce lower returns, a 1% annual difference in fees, for example, makes a huge difference. Fortunately, astute investors have been moving away from high-cost, conflicted advice and toward low-cost investment advice and total wealth management where the adviser acts in their best interests.  Members of National Association of Personal Financial Advisors (NAPFA), such as DWM, have seen major upticks in business and are helping more and more families reach their financial goals.  NAPFA is the country’s leading professional organization of Fee-Only financial advisors.  Its members sign the NAPFA Fiduciary Oath legally requiring all of us to always put your interests first and disclose any potential conflicts of interest.  See the oath: http://www.napfa.org/consumer/NAPFAFiduciaryOath.asp

Not surprisingly, the big banks and brokerages have tried to limit their continuing losses of business by trying to confuse the issue.   Most have set up a part of their business as “fee-only” and describe their total offering as “fee-based.”  Caveat emptor– “fee based” means the big banks and brokers charge you a fee to begin with and then get commissions on top of that for products they can sell you.

Last summer, the Department of Labor (“DOL”), which is responsible for safeguarding employees, issued a ruling that as of April 1, 2017 all investment professionals who work with retirement plans or provide retirement planning advice would be legally bound to act as fiduciaries, putting the clients’ interests first. This rule would impact trillions of employee retirement dollars and likely save participants billions annually in fees. As expected, Wall Street and the related lobbyists have attacked the ruling.  Their complaint is threefold: 1) it would limit choices to participants (yes, it would reduce many of the toxic overpriced funds currently used), 2) trigger dislocations in the retirement services industry (yes, like modifying the behavior of the bad guys or eliminating them), and 3) causing increased costs for consumers (no, it wouldn’t- this is simply an “alternative fact.”).  Last week, as expected, President Trump issued a presidential memorandum to direct the Labor secretary to begin a new rulemaking process to modify the DOL rule.  Of course, NAPFA, the Financial Planning Association (FPA) and the CFP Board all applaud the new rule and are working diligently to put it in place, keep it there and expand it.  We do too.

We support sensible regulation to protect consumers in the area of financial advice and the requirement of fiduciary responsibility to be in place for all investments.  It is estimated that the shifting of $5 trillion of investments from high-cost, ineffective products to low-cost products could save consumers $50 billion per year, transferring those excess commissions and fees from Wall Street, big banks and brokers to your pocket.

Here’s the best part:  Neither Washington nor Wall Street can stop the movement. The DOL fiduciary rule is not shaping investor behavior, it is simply catching up with it.  Vanguard, the industry leader in low-cost indexing, had $1 trillion in assets before the financial crisis, now it has $4 trillion.  Total Wealth Management firms like DWM, which provide both independent investment advisory services and value-added financial services on a fee-only, fiduciary basis, are working with more and more families.

Consumers know what’s best for them- fee-only fiduciaries who put their interests first. They are voting with their feet and their money away from the old toxic models of the big banks and brokers.  The F-Word (Fiduciary) is becoming the antidote to the sale of commissioned financial products.