Oh what a difference two weeks makes in the realm of personal finance! As I write this, the DOW is down over 2,000 points from its all-time highs. The stock market is in panic mode as stocks drop day after day.
The day’s newspaper headlines look like they came straight from a horror movie…
“Pandemic fears send stocks crashing”
“Dow Plunges for a second day on virus fears”
“Coronavirus fear sickens stock market”
“Mortgage rates reach all-time lows as corona-virus hits global economy”
“Market route as investors flee in a panic”
Those are all real headlines I copied from various big name publications around the internet. With headlines like that, it’s hard not to be concerned about what’s been going on in the investing world the last few days. Fear and uncertainty seem to now be running rampant in a market that was reaching new all-time highs only a month ago.
What’s an investor to do? Buy stocks on sale? Sell everything and prepare for the end of the world?
All kidding aside, many people are worried. Several readers have sent me messages, written emails, or left comments, asking what I’m doing about the whole coronavirus situation. After-all, investors (like myself) that don’t rely on job income are more dependent on investment income to fund our lifestyle.
So am I concerned? I think it’s hard not to be…
First of all, let’s put aside all the arrogant talk that COVID-19 (the coronavirus) is “no big deal” and that all this market turmoil is nonsense. This virus *is* a big deal already. At last count, over 80,000 people have now contracted the virus, tens of thousands have been hospitalized, and over 2700 people have died.
Those are not small numbers. That’s a lot of sick people in a very short amount of time… and by some accounts we’re just at the beginning of this thing. We should remember these are real people with real families real lives and real jobs getting sick. People that would have otherwise continued to be healthy and productive members of society.
While it’s easy to discount the numbers and pretend like “it’s just another flu”, I think that’s very wrong-headed way to think about it. Sure, people die every day from numerous causes, but rarely are those situations as disruptive. We have infrastructure and emergency medical staff to deal with the occasional fatal car crash, or odd bad case of the flu in every city in the United States.
Those kinds of deaths happen in small numbers dispersed over the entire year, and spread over the entire country. Existing infrastructure is built to deal with a problem of that size.
Now, imagine you work at a hospital in a small city where a COVID-19 outbreak occurs. Instead of seeing about one hundred sick per day you have three or four hundred sick people showing up at the hospital per day. It’s an entirely different magnitude of problem than what you’re equipped to deal with.
The hospital beds are completely full, patients are lined-up outside the door, the morgue is overflowing with bodies, and there’s no end to the pandemic in sight. What’s worse, you’re running out of medical supplies (masks, gloves, disinfectant, etc), because the factories producing medical supplies are not operating.
Could it get any worse?
How Bad Could It Get?
According to some reports — 40% to 70% of the global population could eventually contract the virus. If the 2% mortality rate continues to hold true, that’s a staggering number of dead bodies to deal with.
Just doing some quick math, 2% of 2.8 billion people (40% of the global population) is 56 million people. Yikes. This, I think, is what I has the stock market in fits the last couple of days — the potential for this new virus to become a big pandemic, like the Spanish flu. Killing millions.
Before you get freaked out, please remember that uncertainty around these numbers is extremely high. Any predictions you hear like this from the news media are likely to be very very far from accurate. Anything could happen at this point, and the stock market absolutely hates uncertainty.
On top of that, local governments and health agencies are likely to close schools, stores, offices and factories to slow the spread of the virus — Very similar to what was done in China. This is likely to slow the economy in the United States, as well as globally.
Major companies like Apple, Microsoft, Marriot, AB Inbev, Walmart, Mastercard, Booking Holdings, and many others have already warned that first quarter profits are going to be a lot lower than expected — either because of supply chain issues, or decreased business due to the virus.
With the CDC now saying it’s a matter of ‘when’ not ‘if’ the spread will happen locally, I foresee a high probability of a global recession.
If you take this perspective, the market turmoil is entirely justified. But is this a reason to sell your stocks and “head for the hills”?
Short Term Disruption Is Likely
While I did say the probability of a recession is high, the stock market can still do anything. Stocks might rise by 3% today, or drop 3% tomorrow. We have no way of knowing which direction markets are going to head in the short term.
Long term is a different story.
Anyone who’s investing in stocks really needs to be thinking very long term. Not just this year or next, but 10 or 20 years from now. Think of buying stocks like investing in a business — because that’s exactly what you’re doing when you buy a stock. You’re buying a business. Most years that business will spit off cash to you and reinvest plenty of profits back into the business.
And some years it won’t. Some years are real sinkers. Would you sell that business based on one bad year?
No, of course not! You’d hold onto that business because of the decades of good years ahead!
While it’s possible that a recession or supply-chain issues will disrupt corporate profits in 2020, it’s extremely unlikely this will continue longer than one or two years. A decade of poor profits due to a virus is extremely unlikely.
In the short term, yes, there is bound to be significant disruption. Profitability will decline.
Eventually though, (maybe in the next year or two) a vaccine or effective treatment will be discovered, and life will get back to normal. Just like it always has in the past. Mankind eventually adapts, overcomes, and staggers onward.
This is why I’m not selling my stocks. Over the long term stocks are bound to do well… even if there is a bad year (or two) due to the coronavirus.
Potential Cash Flow Problems
During one of these “bad years” the biggest problem for retirees and those dependent on investment income (like I am), is cash flow. When the market is going through it’s wild gyrations, generating enough cash can be something of a problem.
OK OK, a BIG PROBLEM if you’re not properly prepared.
Most popular retirement strategies these days seem to recommend living off a combination of dividend income, and selling a small percentage of your portfolio every year to pay for living expenses. You’re not going to live forever after-all, right? So the prevailing theory is that it’s “OK” to sell down the portfolio over time.
That’s great for traditionally retirees with only 10 or 20 years left to live…. but what if you have 40 years ahead of you?
Selling stocks during a downturn can permanently cut into your capital at exactly the wrong time. When you have 40 years of retirement ahead of you, selling stocks to buy groceries during a downturn can seriously impact your retirement budget in future years.
Take for example — a $10,000 annual grocery/food bill. If stocks are temporarily down 50%, that won’t just be a one-time $10,000 bill — it’s actually $20k compounded over 40 years. Assuming capital markets return to normal levels and normal returns (7% average annual returns), that’s $300,000 of capital you’ve spent. On groceries! In a single year!
This is why I have long believed that most retirees should instead live within their means — and that means should actually be based upon dividend income, interest income, and other passive income sources. Not capital sales.
Of course, critics are quick to point out that when recessions happen, dividends and interest rates are also likely to get cut.
This does happen, I won’t deny it. When corporate profits turn into corporate losses, it makes no sense for stocks to keep paying dividends. It won’t happen to every company, but it does happen from time to time.
This is exactly why I maintain a large cash pile — to get through the lean times when my businesses aren’t producing proper returns. These kinds of situations really do happen, and it pays to have cash-in-hand.
Are We Buying?
The next big question on everyone’s mind is, “Is now a good time to buy shares”? The thinking goes, that if stocks are now selling for less, then maybe now is a good time to buy.
But are they really cheap? The S&P 500 has had several bad days this past week, and certainly stocks have declined. But, I think we’re a long ways from a bargain:
The S&P 500 may have gone down considerably in recent days, but prices really haven’t declined much lower than trading levels we saw back in Nov. 2019. In other words, we’re not even close to bargain territory yet.
I honestly don’t think investors should get excited and start buying (yet). If you regularly commit money into a 401k or other workplace savings plan, then absolutely keep contributing to the plan…. but don’t blow every last cent you have on buying stocks because you believe they’re somehow “cheaper” today.
Cheaper than last week, certainly, but not a bargain.
Looking at other metrics like the Shiller PE, we can see the following:
Yep, prices still look pretty elevated. That’s not to say there aren’t also a few individual bargains somewhere in the market — but generally stock prices can still be considered “expensive” when comparing against historical levels.
Will we see a true bargain in the coming days? Who knows! Like most humans, I’m actually terrible at predicting the future. Instead, I chose to remain on the sidelines with “cash in hand” until actual bargains arise — not the perception of bargains based upon a few wild headlines.
In fact, it’s wise to just ignore the new headlines entirely when it comes to investing. Focus on what’s knowable and keep your focus on the long term — because I can almost guarantee we’ll see more crazy headlines in the coming days.
Until then, stay safe out there everybody!