The Question Every Advisor Must Answer
With the recent market rally, stocks are again near their all-time highs. But we face a perilous economy, coupled with the threat of a resurgence of the coronavirus. Here’s what I tell clients who are dead-certain that the stock market is due for a significant correction.
The question every advisor will hear from at least one client is whether now is the time to reduce risk in equities and “stay on the sidelines” for at least six months.
The perception that each bear market is different is typical, but I’m hearing many people say, “This time really is different.” Never before has something as small as a microbe changed our lives so profoundly and inflicted permanent damage on our economy. Let’s add nationwide social unrest and a dysfunctional political climate. With the bankruptcy business booming, and the lack of assurance that we will ever come up with a vaccine, I’m hearing statements like the following:
- An economic depression is possible, if not likely.
- There would be at least a 50% market decline.
- The chance of a rally, much less getting anything close to historical stock returns, is near zero.
- A state-issued general obligation (GO) muni bond held to maturity is safe – no defaults since 1932 – and yields 5% on a taxable equivalent basis.
- Take everything out of stocks for at least six months or until after a big correction.
Though I agree with some of those comments, here is how I respond to them, followed by what I advise clients to do.
What I tell clients, oddly, seems to make them feel better.
An economic depression is possible, if not likely
It absolutely is possible, and it was possible last year as well. The probability of a depression is greater now than it has been in my lifetime. That said, I doubt it is likely.
The Federal Reserve has tools it didn’t have during the Great Depression. Never before have the world’s scientists, corporations, and governments come together to find a global solution to this pandemic. This isn’t the first pandemic the world has seen and capitalism has managed to survive.
Many others don’t share my view. Jeremy Grantham has been pessimistic on stocks for many years and his GMO fund is now shorting global stocks, saying markets are out of step with the real world. Grantham did call the bottom right in March of 2009. But predicting depressions isn’t easy. Those who bought into the logic in Harry Dent’s 2009 book, The Great Depression Ahead, missed out on much, or all, of the longest bull market in history. Afterall, the financial system seemed like it would collapse back then. The cause today is different, but the fear is the same.