Perspective on the Effects of COVID-19

The stock market has continued to decline over the last month as the impact of COVID-19 (coronavirus) has impacted public health and the economy. It was less than 30 days ago that the S&P 500 Index hit a high of 3386. At current levels, the index is down about 28%. 

Concern about one’s investment portfolio during times of turmoil and uncertainty are normal. Emotions can challenge even the most disciplined investor. As we’ve written before, the natural human response is to do something when faced with a threat - the flight or fight response. However, history shows that “doing something” during times of market distress almost always lead to an inferior outcome when it comes to investing.

I’ve heard “experts’ on CNBC opine that it is different this time. It is different, but it’s also the same. It is difficult to separate the public health crisis from the market decline but doing so helps provide context and perspective. The team at Dimensional Fund Advisors (DFA) have produced a video that helps put the current market in perspective, and we recommend you spend 20 minutes to view it.

Additionally, the market’s current earnings estimate for the S&P 500 is $168^ per share, down from $178 in January. If we discount that earnings estimate by 30% we get $118 per share. With the S&P 500 currently at 2386, that’s an earnings yield of 4.9%.  As a comparison, the yield on the 10-year US Treasury bond is 1.4%. For those that can stomach near term discomfort, the opportunity for owning a basket of broadly diversified companies will almost certainly deliver more wealth over the long-term than the alternative of cash or bonds.

Finally, during uncertain times it may help to look to Warren Buffett as a guide. Last month Buffett published his annual Berkshire Hathaway shareholder letter. On page 10 he said:

“What we can say is if something close to current rates should prevail over the coming decade and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term fixed rate instruments (bonds).

That rosy prediction comes with a warning: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater, But the combination of The American Tailwind, about which I wrote last year, and the compounding wonders described by Mr. Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!”

My guess is in several weeks we will learn that Berkshire Hathaway was a buyer of stocks (perhaps their own) during this time. Our preference is to always be on the same side of the trade as Mr. Buffett.

If you should have questions, please give us a call.

^Source: Yardeni Research