There are a couple of topics we want to discuss this morning; the risk of market timing and the Fed's actions overnight.
With respect to market timing, we understand the temptation to try to time the market, but moves like Friday's help demonstrate exactly why we should not. There will be up days and up periods that investors will miss, and missing those periods will have a negative impact on investor returns. In looking at the last 25 years of the market's data, we found that if an investor had missed the best 50 days of the market, their returns would have dropped from +7.3% per year to -2.5% per year. If they had missed the best 40 days, they would have dropped from a +7.3% to a -1.1%. If they had only missed the best 5 days of the market's return, they would have dropped from +7.3% to +5.5%.
Further, we see that the Federal Reserve (and the rest of the world) are taking the "whatever is necessary" approach to dealing with the Coronavirus outbreak. And while we understand that the Fed cannot stop the Coronavirus, there are a great many health professionals who are working tirelessly to address it. The Fed is working in the financial markets to provide these health professionals time; they are providing a bridge loan of sorts to the economy. The virus will come to and end, and when it does, as with every other crisis the markets have endured, the market will rally. And like with other crises, the best days are likely to be mixed in within market sell-offs (like last Friday was). And we discussed above, even missing only 5 of the market's best days in a 25 year period cost 1.8% per year to investor returns. This may not seem like much, but 1.8% over a 25 year period equates to 56% in cumulative returns. Below is a table showing a history of the market's best days.
On the topic of the Fed, last night, the Federal Reserve made another emergency rate cut, bringing the target Fed Funds Rate to 0-0.25%. They also announced that they plan to start a new $700 billion Quantitative Easing Program. They are acting in response to the Coronavirus to ensure there is ample liquidity in the economy. The strategy is not new; during periods of extreme market pressure the Fed steps in with rate cuts and quantitative easing to stabilize the markets. So far, the strategy has never failed.
Further, all the fundamental data suggest we should be near the bottom of this, and that the market is attractively priced. We've included a number of charts below showing data relevant to the market's current drop and its valuations.
Investors who have been willing to accept the volatility the market brings have done well despite the volatility. We know the stress that comes with watching the market during these periods, but we also know this crisis, like all other crises before, will pass.
Please call or email us with any questions.
Sincerely,
Fortem Financial
www.fortemfin.com
(760) 206-8500
