When is the time to sell and liquidate portfolios? Most advisors, according to a recent study by Howard Schneider of Practical Perspectives, says most advisors have seen little impact from the stay at home orders and they perceive the market will return to normal in six months.
I have considerable concern. Yes, I am staying the course today and am optimistic that we will be back to normal by the end of this year. But I am not blindly staying the course.
Usually, I try to accomplish at least five tasks every day. On March 12th, I spent the entire day on one task and that was to determine when I should liquidate all client portfolios, excepting the profit-sharing ones which had short positions. That was prior to the stimulus package proposed by the government.
I had done several radio programs on the Spanish Flu prior to the coronavirus. I looked at the news from China, South Korea, Italy, and Iran. The similarities were obvious. I am a numbers guy. Regardless of the administration, I want to assess the real impact on the market. My realization on March 12th was that the United States was late in addressing the pandemic.
I had just returned from an investment conference earlier in the week. And as I pondered on the 12th, I realized I was wrong to have gone to that conference. Governor Inslee had just issued his ban on groups of more than 250 people. I was very involved with a charity event that following Saturday that would have brought together 175 people. I made the recommendation to cancel that event.
I don’t have a crystal ball; I can only make the best educated guess. On March 12th, I spent the day analyzing the impact of the coronavirus if it was left unchecked. San Francisco had not yet issued a stay-at-home order. I thought about the impact on businesses if we saw the spread of the virus in the same way Italy was experiencing it.
In retrospect, my analysis was not far off. We are seeing meat plants close in South Dakota and Iowa, states that have to stay-at-home orders. The Smithfield pork producing plant has shut down. That plant represents 4% to 5% of all pork production in the United States. It employs 3,700, but so far 240 of the employees have tested positive for COVID-19. Tyson has shut down plants. Other meat producers are shutting down.
The spread of the virus was typified by Biogen. In late February, at their annual leadership meeting, a number of Biogen’s senior executives were infected. Feeling healthy they left the meeting and boarded planes full of passengers and carried the virus to at least six states, and overseas as well. They were all feeling well, without symptoms.
The Spanish Flu spread the same way. 50 million people died from the Spanish Flu pandemic. We know a lot more today, and we identified the coronavirus as a pandemic in time to react swiftly. But on March 12th, the United States government was not reacting.
Economists are now estimating the GDP could be down 40% in the second quarter of this year. That is no surprise. This estimate even took preventative measures, like the Stay-At-Home Order, into account. On March 12th, as I was thinking through this, I knew that with no response, or a very late response, the GDP would be down a lot. How did that translate to the markets?
My analysis can be summarized like this:
The DOW’s highest point had been 29,551. The DOW had finished at 23,390 on March 12th, a 21% decline. Previous studies estimated that the markets usually recovered about 1/3 of the decline once markets reached a bottom. That held through 42 declines from 1860 through 1990, in good economic times and bad. It held during the Great Recession.
On March 12th, we were still in the earliest stages of the pandemic and the market was already off 21%. If the GDP were to take a large drop, I believed the market could bottom at 6,000 to 7,000, a decline of 75% to 80%. If that were to happen, what was the best strategy? If I sold at DOW 18,000 and bought back at DOW 8,000 and the market recovered 1/3, what would that look like for portfolios?
For a hypothetical illustration consider this:
$100,000 on January 15th, the DOW high, would have declined to $79,900 on March 12th and to $61,000 with the DOW at 18,000 when the stocks and bonds would be liquidated. With $61,000 in cash, if the DOW reached a low of 7,000 but was reinvested at DOW 8,000 and the DOW recovered 1/3 of its value in 3 months to rise to 15,541, the newly reinvested portfolio would be worth $117,744. That is 17% higher than it would have been at the peak of the DOW. If and when the DOW got back to the high, the portfolio would be worth $228,376!
A hang-in-there-everything-is-going-to-be-alright portfolio would be $100,000, while our portfolio would be $228,376 more than double the “hang-in-there” portfolio.
That assumed there would be little or no response to the coronavirus.
San Francisco ordered the stay-at-home order on March 16th and it was expanded to all of California four days later, on the 20th. Republicans rolled out a proposed $1 trillion stimulus package on March 19th that would end up at $2.2 trillion.
My fear for a collapse in the markets went away, at least for the time being. A new analysis showed that we would probably survive and might have already seen the bottom of the market this time. COVID-19 cases were going to be high, and so would the death rate, but the actions that were taken reflected those which slowed the Spanish Flu pandemic, and the stimulus package would fill a lot of the GDP gap. I did not sell, but it is never out of my mind while we still fight the virus.
I share this so you can understand my thinking. I often ask fellow financial advisors what value they bring – how are they better than a robo advisor? Robo advisors can handle financial planning at a fraction of the cost. The response from the advisors, without exception, is that their clients need them to hold their hands during downturns. Clients are paying a lot of money for comfort if that is the value of most financial advisors.
I believe I bring more value. I was prepared to respond not by holding hands and saying everything will turn out fine in the end, but by understanding when to sell to benefit my clients and buy everything back at much lower prices. For the Great Recession, and probably for the coronavirus pandemic, holding hands and saying everything will work out just fine will probably work.
But we live in a black swan financial universe, and random, unexpected events do occur that jolt the markets and can send them spinning down. I would guess there will be more black swans. I want my clients to know that I am not here just to hold hands and say everything will be alright. I want to see what the potential downside can be and if it begins to unfold, I want to protect my clients’ investments. I want my clients to know I am not only there to assure them but also there to analyze and protect their investments in case everything does not turn out ok.
I believe that is part of the value I bring. I also believe that times like this should beg the question “is my financial advisor ready to protect me from a real market meltdown?”
If not, then maybe it is time to find an advisor who will.
 “How Financial Advisors Are Responding to the Challenge of the Coronavirus”, Howard Schneider, Practical Perspectives, April 11, 2020.
 “One of the Largest Pork Processing Facilities in the US is Closing Until Further Notice”, Danieel Wiener-Bronner, CNN Business, April 13, 2020.
 “Meat Plants Are Shutting Down as Workers Get Sick”, Danielle Wiener-Bronner, CNN Business, April 8, 2020.
 “Are We Heading for a Historic Economic Collapse? Why the US GDP Could Fall by 40%”, Barron’s, April 12, 2020.