Mark Manson is a writer I admire for the quality of his thinking. In his Monday Newsletter, he wrote the following:
Pick Your Poison: Health Crisis or Economic Crisis? - If you quarantine large swaths of the population, now you’ve created another predicament for yourself: commerce grinds to a halt.
It’s estimated that 30% of small businesses in China are closed right now. Japan closed all of their schools for March, sending nearly a million teachers home without work. Millions of workers are telecommuting rather than going into the office, likely causing productivity to drop. Thousands of flights, cruises, conferences, and events are being cancelled around the world.
If you do the prudent thing for the population’s health, you introduce a new systemic risk: economic downturn. But if you avoid economic downturn by encouraging people to go about their lives as normal, you exacerbate the risk of a public health crisis.
It’s interesting to see different cultures taking different approaches to this conundrum. Some countries are clearly more willing to give up economic stability for the sake of greater health. Other countries are willing to risk a health crisis for the sake of short-term economic stability.
I have to say that I agree wholeheartedly to most of what’s written above. But it appears that we have a bit of a health crisis AND economic crisis on our hands. Especially as I write this, the S&P is down about 7% on the day and it’s only 9:45 a.m.
We can almost assuredly expect quarterly earnings and revenues to drop across a wide spectrum of companies. It’s the nature of a health crisis resulting in an economic downturn - whether or not it is short-lived remains to be seen. I’ll go out on a limb here and say that this downturn is healthy - no pun intended.
For months (years), economists the world over have been waiting for the other shoe to drop. They’ve been calling the market overheated or overextended for years on end.
Once we get a handle on the extent of the health crisis, I think we’ll see the economic ramifications sort themselves out rather quickly as people get back to work as normal as well as taking their vacations, going on work trips, or whatever. The fact that economists and pundits can stop talking about how long in the tooth the bull market was getting to be should be a net positive.
Prior to this health scare, the economy was humming right along as we added around 270,000 jobs in the month of February, but that is old news at this point.
In any case, regardless of how long this may go on, it’s okay to be scared. Both from a health perspective and a portfolio perspective, being scared is a perfectly normal feeling. But the response should still be the same regardless of how you feel. As the late John Bogle regularly said:
Stay the course.
Simple advice. Hard to do. I hope that whether you are a do-it-yourselfer or in working with your advisor that you developed a plan and built a portfolio around that plan. In doing so, your portfolio was established with a long-term viewpoint and already accounts for short-term volatility like this - even significant volatility.
Nothing is free in life - the volatility is the premium we pay for long-term returns. There is no way around it. Reacting to downturns can harm your long-term returns and by extension, your long-term financial plan.
It’s why stay the course is wise advice.
And one more reminder just for good measure; your retirement is likely to be a 30+ year experience. Maintaining your focus on the long-term is about the only thing we can do when we go through periods like this. If history is our guide - and mind you, it is the only guide we have - at some point, the market will continue its long-term trendline up again. When that will happen is the only question that remains.
As I wrote last week, we (nor anyone else) knows when the market will turn back around, but you don’t want to be the one who sold just before it turned. Hopefully, you prepared for this before the storm hit the markets.
Relevant Reading from the Archives:
This post is not advice. Please see additional disclaimers.