Similar to 2001

The recent stock market decline has drawn many comparisons to the financial crisis of 2008. Those were scary times for sure, but for me the recent market action seems much more similar to the aftermath of 9/11.

The stock market was closed for a handful of days after 9/11, and there was a lot of fear about the lasting damage the attacks would have on corporate America and the overall economy, not to mention the psyche of the American consumer.

The Dow Jones Industrial average fell over 16% in the week that the markets re-opened, and the “mental state” of the average American seems eerily similar to how many people are feeling in the current coronavirus crisis.

We know that the stock market and the broader economy eventually bounced back after 9/11, and I am confident it will bounce back again as this crisis passes. It is very difficult to put a timeframe on this though, as there is no way to handicap how long the coronavirus scare will keep people (consumers) home.

In 2001, many of us carried on as we always had, even getting back on planes relatively quickly. I am unsure how long it will take for the average consumer to be comfortable traveling again or attending functions with a lot of people, when we are all being advised to limit contact with others. Even when the travel restrictions are lifted, would you consider seeing a Broadway play this summer? How about a trip to Disney this fall? Nobody knows.

Personally, I’ve always been a large Amazon shopper, and that won’t change. But what about the restaurants our family would visit, or the trips we would take during our children’s school breaks? All of that seems to be on hold for a while.

Unlike the great recession of 2008, banks are better capitalized today, and the Fed has moved quickly to inject more liquidity into the markets. In addition, there should be less political fighting about stimulus packages, because there is no “moral hazard”. In 2008, stimulus packages were delayed because of the belief that many banks “brought the problem on themselves” by taking on risky mortgages. I think all lawmakers are aware that the coronavirus crisis is biological in nature, and not due to fiscal or monetary mismanagement. This should allow various stimulus and relief bills to get passed more quickly.

Because the current crisis has not emanated from the economy itself, that should hopefully allow the economy to bounce back more quickly. Remember, just 10 days ago on March 6th, the February jobs report was released, and the US economy added a whopping 273,000 new jobs, and the unemployment rate fell to 3.5%.

Of course, that number is certain to fall when the March report is released on April 3rd, but my point is that prior to the virus scare, the overall US economy was doing quite well. In 2001, the 9/11 attacks exacerbated the selling that had already started when the tech bubble burst in 2000.

Trades Last Week:

Given how quickly the markets are moving, it is difficult to communicate the “whys” behind various trades to clients as they happen. I thought a summary of the trades we placed last week would be helpful.

Not all clients own all of these securities or asset classes, but all clients own at least some of them:

We eliminated the small positions we had in international small companies as well as emerging markets stocks. Approximately half the proceeds we direct to the S&P Low Volatility Stock Fund we own, and the remainder went into cash. As all companies hunker down, we feel the larger international stocks are better positioned to weather the storm, but we didn’t want to add more to those companies – we just wanted to reduce the small-cap and emerging markets exposure overseas. We still wanted a portion of that positioned for a rebound, so we brought it back to a US fund with the Low Volatility index. Emerging Markets rely more on commodities for their revenue, and low oil prices should hurt those economies more than the US.

For the same reason we eliminated emerging market stock funds, we also eliminated the emerging markets bond funds. A portion of the proceeds went into developed nations international bonds via the PIMCO Foreign Bond Fund, with the rest increasing our cash position.

We sold a portion of our position in Kinder Morgan energy pipelines and invested most of the proceeds into Omega Healthcare and Ventas. Kinder has been hit with fears of lower oil prices, but the senior housing health care companies were down more over the past week. There was a different nursing home company that reported a coronavirus outbreak at one of their facilities in Seattle, and all senior housing stocks got hit. Ventas is getting back close to where it was in 2009-2010 after the financial crisis. Ventas, Omega, and all of the senior living stocks are simply the landlords. Even the company in Seattle is just the landlord. I don’t see the rationale of any liability coming to the landlords – that would fall on the operators. In addition, the demographics still support the need for more nursing homes and senior living facilities in the coming decade, so I think there is an opportunity there. I can understand why airlines and cruise operators would get whacked, because it will take a while before people are comfortable traveling again, but the nursing home operators should still keep paying their rent.

As much as I think Kinder will recover, we were able to purchase stocks that were beaten down more, and pay a higher dividend yield, by making the move to Ventas and Omega. We still maintained a small position in KMI in case the Saudi’s and Russians come to some sort of compromise in the coming weeks.

We sold our position in the small and mid-cap low volatility funds and moved half of the proceeds to the large-cap low volatility fund which was already owned by most clients. The large-cap fund (SPLV) has held up better than the overall market. The net result still reduces overall volatility since the large-cap fund should be better insulated from any further declines as compared to the small-mid cap funds.

We sold a small amount (25%) of our position in the Defense and Infrastructure Funds, moving a portion of those proceeds to the large-cap low volatility fund. Boeing is a big weight in the defense fund, and we if we have to spend a large amount of money on coronavirus stimulus as a nation, it’s conceivable that some of that money comes from what would otherwise be spent on defense or infrastructure.

Finally, we trimmed a small amount of the Osterweis multi sector bond fund and a portion of the Fidelity Floating Rate Fund and Virtus Seix Floating Rate Fund and moved the proceeds to cash. Osterweis, Fidelity, and Virtus take very little interest rate risk (since they are all short-term bonds or floating rate debt) but they do take more credit risk (lower rated companies) so we thought having a bit more cash might be helpful should this volatility persist.

Tax Loss Opportunities Today:

While we did raise some cash last week, and a small amount in some portfolios today, rarely has large-scale selling been the best course of action during market panics.

Trades that were very appropriate today, and will continue in the coming days as well, were swapping certain investments that are down for similar investments, in order to realize capital losses to be used when your 2020 income tax returns are filed.

We are always looking for tax loss opportunities in the fall months, but this year we are hopeful that we will see a large recovery by then, which would mean certain tax losses that are available today might not be available in November or December.

Whenever a trade is made for a tax loss, we are not necessarily “locking in” that loss, because we are purchasing a similar security at the same time.

For example, let’s suppose a client purchased $10,000 worth of ABC mutual fund each year over the past 5 years. The shares purchased 3-5 years ago might have significant capital gains, but the shares purchased in the last 1-2 years might currently show a capital loss. We placed trades today to sell just those shares of ABC fund with a capital loss, and immediately reinvested most of the proceeds into XYZ mutual fund with a similar investment philosophy.

This will allow us to capture the capital loss for tax purposes, but when the market ultimately recovers, we’ll see that recovery in the “new” XYZ fund shares instead of the “old” ABC fund shares.

The last 5,000 point decline:

I mentioned earlier that the velocity of the recent market decline feels very similar to 2001. For tax trade purposes, we don’t have to go back that far to review a similar time in history – we can look back just about 18 months ago to the fall of 2018.

From January 1st through October 3rd of 2018, the Dow Jones Industrial Average moved higher by close to 9%, peaking at 26,829 points on October 3rd.

From October 3rd through December 24th, the Dow declined by over 5,000 points, landing at 21,792 points on Christmas eve.

We started the 4th quarter of 2018 with no tax loss opportunities in the portfolio, but by the end of the year we were able to bank significant capital losses to help our client’s tax returns, and yet we remained well positioned for the stock market rebound that took place in 2019.

An interesting story – I was chatting with a client last week and I made reference to “the last time the Dow dropped 5,000 points” and he said “you mean back in 2008”. I said no – the drop a year and a half ago.

He was stunned. He said he had no recollection of the Dow dropping 5,000 points in 2018. That’s a good thing. It was definitely a scary time back then as well, as everyone wondered if trade tariffs would send the global economy into a deep recession. We made it through that time period in history, just like we made it through 2008, and 2001 before that, and I am confident we’ll make it through this time period as well.

Where do we go from here?

When will people be comfortable congregating in crowds again? When can we all get back to Disney world?

It now seems like the 2-4 week closure period for schools and mass gatherings is a bit optimistic. The CDC has recommended extending “social distancing” for up to 8 weeks. I don’t think any schools or businesses want to “announce” that today, but I think we have to be prepared to hunker down for longer than is currently being considered.

As mentioned in previous communications, for clients who are purchasing new homes or new cars, sending their children to college, or retiring in the coming months, we’ve already set aside the money needed for those endeavors in the more conservative-to-moderate parts of your portfolios.

For clients who rely on their portfolios for month-to-month income, we tend to keep anywhere from 5 to 15 years worth of monthly withdrawals in the more conservative-to-moderate parts of your portfolio, more than enough to provide for any month-to-month needs without needing to sell stocks in this volatile environment.

What we need right now is time. We need time to see the positive benefits of “social distancing”.

We’ve seen the cases start to peak in China and South Korea, and we need time for cases to peak in Europe and the US. While this might be several weeks away, hopefully the proactive measures that may seem inconvenient today will mean we can get ahead of the spread.

We’ve seen Apple reopen all of their stores in China. We need time to see stores, shopping malls, and theaters re-open in the US.

Time will heal more than the Federal Reserve or the President.

About the author

William B. Burns, Jr. CFP® is a CERTIFIED FINANCIAL PLANNER professional and President of Burns Matteson Capital Management, a Financial Planning and Investment Advisory Firm with clients in 21 states throughout the US. He helps high-net-worth families reduce the worry and anxiety sometimes associated with wealth, allowing families to reclaim that time to reinvest back into their family, social, and professional relationships. www.BurnsMatteson.com