Note from the CIO: Is This Time Different?

Every Crisis Feels Different

We are all stunned by how quickly our lives have been turned upside down. And we are no less shocked by the drop the stock market has taken since the COVID-19 crisis began. Please know the Abacus Investment Committee is laser-focused on this, which includes regular communications with the advisors at Abacus whom you work with.

Major drops in the stock market are not unusual. COVID-19 is the fifth significant market drop this century. We worked our way out of the other four, which include the two worst since the Great Depression, namely dot-com/9-11 and the Financial Crisis. We knew during those crises, just as we know now, that our clients will be okay because we factor these drops into all financial planning scenarios we run. None of these scenarios, not even the Financial Crisis, are beyond the realm of our expectations.

Every crisis feels like “this time is different.” That’s because each new crisis is unique in its circumstances, including COVID-19. We have been through six health outbreaks this century alone, so we are not in entirely new territory. What is new — or hasn’t been seen since perhaps the Spanish Flu of 1918 — is COVID-19’s death rate: it’s not so high that it kills victims before they can spread it (like SARS), but it’s not so low that we can go about our daily lives as it spreads (like Swine Flu).

The Path Forward

It’s important to remember what we have going in our favor in the fight against this virus. We knew what it was in ten days. By contrast, it took two years to identify HIV. We’ve known how to detect it since January 13. The curve of total infections in China has flattened, and South Korea’s curve is close to flat. That does not mean those two countries are out of the woods, and they could end up with a second wave of infections. But it shows us there is a path forward, which is an important step in stabilizing the market. It’s also reassuring to see China’s stock market go from being among the worst in the world when they announced their health outbreak this year, to a top performer when their infection curve flattened.

It’s okay to have some fear and anxiety, they are important evolutionary tools. However, one of the biggest mistakes an investor can make in any crisis, and this one is no different, is to act on those emotions. This could likely grow into a humanitarian tragedy before it’s over which would be tragic to all of us.

From an investing perspective, it is critical to bear in mind the real values behind capital markets are:

  1. Its workers, from physical laborers to CEOs.
  2. The physical assets and products.
  3. The companies’ intellectual property.

Even in the worst-case scenarios suggested for this crisis, those three factors can only be impaired in minor ways. At the same time, there is no limit to human needs and desires, and when it is time to get back to our daily lives there will be unquestionable pent-up demand for goods and services.

Staying the Course

This is why we are urging you to stay calm and focus on your long-term plan. Those plans are based in large part on stocks earning a premium over “safe-haven” investments like cash and bonds. And this crisis is a good reminder for those who only started investing after the Financial Crisis: this is what the stock market risk premium is all about. Being able to stay invested through this kind of uncertainty is why one earns the stock market premium over time. That premium allows you to spend more over the long-run or make working optional sooner. There is a price for everything. And this is the price for having a stronger financial plan that is fueled by stocks.


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