March 18, 2020

This paid piece is sponsored by The First National Bank in Sioux Falls.

By Adam Cox, executive vice president and chief wealth management officer

As far back as I can remember, whenever I would tell my mom about something challenging I was going through, she inevitably came back with the same stock answer: “This too shall pass.” Man, did I hate that! I wanted her to indulge me in my angst and give me the confirmation I was looking for. Instead, she would calmly and assuredly tell me that everything would be OK, when what I really wanted was affirmation that what I was feeling was completely normal.

That’s my message to you today. What you’re feeling is normal. Dramatic declines don’t feel good, even for investors with many years until they need to begin pulling from their investments. And while I do absolutely believe that “this too shall pass,” I want to acknowledge the feelings of angst and confirm that it’s natural if we feel that way.

I’ve been thinking a lot about my mom’s advice over the past few weeks as the markets have experienced significant volatility and continued a sell-off. At this point, we are beyond wondering if  this coronavirus will impact the economy. It has, and it will continue to for some time. What happens in the long term is more certain – markets recover from times of stress and move higher.

In the short term, markets primarily are driven by one of two things: greed or fear. Just over a month ago, markets were at all-time highs. Greed – not using the word negatively in this instance – kept investors in the markets, and confidence was sky-high. A few short weeks later, fear now has the upper hand. How did we get here?

Markets, like all of us, hate  uncertainty. None of us truly knows the eventual impact this virus will have on our economy. That fear pushes prices down. We know that economies will take a hit in the near term. We are a consumer-driven economy, and when we don’t travel, go to concerts or shop at the mall, the economy notices.

In the long term, markets are driven by earnings – or anticipated earnings. The market selling off is actually a sign the markets are working. The market has begun pricing in lower earnings for many companies and sectors of the economy. When the smoke begins to clear and good news starts to break through, the expectations of higher earnings will drive prices back up. How much and how quickly is yet to be determined. Much of this bounce back likely will be driven by pent-up demand – for example, taking those trips we’ve canceled, going back to the mall, etc. But it’s a fool’s errand to try to predict precisely when that will happen. Market timing simply doesn’t work over the long term.

This is not the first time markets have pulled back this severely, and it won’t be the last. Each time this happens, we all have the same reaction: “But this time is different.” And that’s completely true! Each time we experience market shocks like this is  different. But we’ve been here before, even recently. In 1999, everyone was convinced that all of our computers wouldn’t work – remember Y2K? – and the economy suffered because of it. After 9/11, investors “cocooned” and drastically limited large public gatherings, including shopping venues, and didn’t resume spending for a period of time. In 2008, investors were concerned the global financial system was in free-fall – it was – and that it could take many years to recover. The Greek debt crisis created fear of widespread municipal defaults, resulting in a global recession. Similar sentiments abounded when U.S. Treasury bonds were downgraded and likewise when Brexit built up steam. And it’s easy to forget that in late 2018, the markets dropped by 20 percent as investors were convinced that an unrivaled 10-year bull run was destined to end in an imminent recession. Yet the markets persisted and, in all cases, recovered beautifully.

I’m not in the predictions business – and you should be cautious of those who pretend to be. Many pundits are predicting a recession in the near term. They could be right. We can’t say for certain. Nor can we predict how long markets will stay down. What I can say for sure is, based on history, clients who work with an adviser and have a plan that’s suitable for them, in any market, will be fine in the long term.

If you’d like to learn more about working with one of our credentialed professionals to navigate times like these, contact us on our website.

At First National Wealth Management, we have been preparing our clients for a pullback for the past couple of years by shifting allocations and building cash – not because we saw something like this happening but because we’re students of history. Since 1949, the S&P has dropped by at least 20 percent about once every seven years. We can’t time markets, but we can prepare for certain eventualities. Rather than panicking, now is the time to re-evaluate your risk tolerances, your investment allocation, your debts and your liquidity position. Smart investors wait things out, rebalance through the pullbacks and take advantage of tax-loss harvesting. These investors generally recover faster than the market and come out far ahead. Investing is easy when times are good. In challenging times, it’s important to stick to your plan and stick it out.

What you’re feeling is normal – and this too shall pass.

Any comments, insights or strategies discussed in this article are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything written here, please consult with your attorney, CPA and/or your financial adviser.