Each month we ask clients to spend 5 minutes to read through our newsletter to with the goal of raising their investor IQ. What should investors be focusing on this month?
In this month’s commentary, we cover the following topics in greater detail and since most investors are tired, we included a few extra pictures in this month’s edition.
- Sanders feeling the burn after Super Tuesday
- Market meltdown, what professionals are saying
- Putting Coronavirus in a historical perspective
- Frequency of market downturns
- World Health Organization update on Coronavirus from 03/04/2020
- Beware of tax season scams
Sanders feeling the burn after Super Tuesday
After positive results for Joe Biden in the Super Tuesday Democratic primaries, the former VP has established himself as the current front-runner to challenge President Trump in November. Over at electionodds.com, Biden now has a 75.5% chance of winning the nomination, which is almost a full 60 percentage points ahead of Bernie Sanders. Those numbers are certainly comforting for Biden, but we would remind people that as recently as 2/24/2020, the roles were completely reversed with Biden at 5.5% and Sanders over 50%!
The Democratic primaries have become a two-person race. With poor showings from both Bloomberg and Warren, they have dropped out of the running and now even Hillary Clinton is ahead of them in the betting markets. It sure has taken a lot of time and money to get down to the final two candidates, who also were the top two candidates starting the primary season.
Market meltdown, what professionals are saying
- The last week of February, North Star sent out two long and detailed commentaries about the market and Coronavirus. If you did not have a chance to read them, let us know and we can send you a copy.
- China, the epicenter of Covid-19, has seen the largest increase in its percentage of world market cap of any country both year-to-date and in February. How the hell is China closer to a YTD high than any other major global equity benchmark? – Paul Hickey, Bespoke
- The coronavirus is scary stuff for businesses and investors, but the outbreak has not changed his long-term optimistic outlook on stocks. The global economy is still strong and while companies may be negatively impacted by the coronavirus, he remains optimistic about the long-term prospects. – Warren Buffett, Berkshire Hathaway
- This disease maybe more dramatic if it hits Africa than if it's in China (or a developed nation). I'm not trying to minimize what's going on in China in any way. If coronavirus gets into Africa, it could overwhelm their health systems. – Bill Gates
Putting Coronavirus in a historical perspective
A look at history shows that while markets react to news events in the short term, they have tended to reward patient investors over long periods of time. Indeed, global markets have shrugged off the impact of past viral outbreaks. While the past is not predictive of the future, it does offer valuable perspective.
Frequency of market downturns
Coronavirus maybe new, but market volatility is not. On my mental to do list for a healthy market is to see the S&P 500 drop 7-10%. While it never feels good, short-term corrections are healthy to shake out excess greed which can cause extreme bubbles in the market. The S&P 500 is currently down around 10% from all-time highs (2 weeks ago). Through the years, we talk extensively about preparing for downturns and even the ability to weather a 4-5yr extended drop like we experienced in 2008. Clearly the speed of the drops in recent years has shortened the duration of the falls (and recoveries). We thought the following chart from American Funds would help to put in perspective the frequency we experience various drops.
World Health Organization (WHO) update on Coronavirus from 3/4/2020
As a reminder, the traditional flu season for 2019/2020 was already expected to be more severe than normal. CDC estimates that, from October 1, 2019, through February 22, 2020 in just the United States, there have been:
- 32,000,000-45,000,000 flu illnesses
- 18,000-46,000 flu deaths
Now, back to the Coronavirus…
China has reported 80,422 cases to WHO, including 2,984 deaths. Yesterday, only 5 new cases were reported in China outside of Hubei province (the number of new daily cases outside Hubei continue to fall). The Chinese epidemic peaked and plateaued between the 23rd of January and the 2nd of February, and has been declining steadily since then.
The key message that should give all countries hope, courage and confidence is that this virus can be contained. Indeed, there are many countries that have done exactly that.
The increase in cases outside China has prompted some media and politicians to push for a pandemic to be declared. We should not be too eager to declare a pandemic without a careful and clear-minded analysis of the facts. WHO has already declared a public health emergency of international concern – the highest level of alarm. Using the word pandemic carelessly has no tangible benefit, but it does have significant risk in terms of amplifying unnecessary and unjustified fear and stigma, and paralyzing systems.
For the moment, we are not witnessing sustained and intensive community transmission of this virus, and we are not witnessing large-scale severe disease or death. China has 80,000 cases in a population of 1.4 billion people. In the rest of the world, there are 13,000 cases, in a population of 6.3 billion.
Beware of tax season scams
Tax season is a prime time for Internal Revenue Service (IRS) scammers to target senior citizens. The scam commonly involves an unsolicited telephone call, text message, or email from an imposter IRS agent who tells the targeted individual that they owe money to the IRS. The scammer then gives instructions on how and where to pay their debt.
We have already had several clients and family members targeted by these scams over the last few weeks. Remember, the IRS is not going to initially call, text or email you. They will send a letter of inquiry to start the process.
Clients can visit the IRS website for additional information and determine if an inquiry is legitimate.
Where will the market go next?
As noted above, it is still too early to tell how the outbreak will unfold. From an economic perspective, we expect very little long-term impact. Any short-term impact will likely be viewed as a one-time anomaly and written off by investors similar to other viruses and natural disasters. In fact, a rough quarter or two may allow companies to write off additional expenses clearing the way for cleaner balance sheets and greater profitability in future quarters.
We are passionately devoted to our clients' families and portfolios. Let us know if you know somebody who would benefit from discovering the North Star difference, or if you just need a few minutes to talk. I have added some extra time into my schedule to be available for calls.
In the meantime, all virus transmission can be reduced by washing your hands and reducing contact with others.
Mark Kangas, CFP®
CEO, Investment Advisor Representative