Corona Virus – Market Update

Today saw the largest one day drop since 1987 as fear of the corona virus hit the markets. Most market indexes are now down 20% from their high which is what qualifies as a market correction. In 1987, the market dropped over 22% on what is referred to as “Black Monday”.

When Was the Last Market Correction?

Our last market correction of 20% occurred less than 2 years ago in the second half of 2018. It was not as fast as this most recent drop, but markets recovered very quickly in 2019.

Wait, why are some outlets saying we haven’t had a correction since 2008?

I really do not know. They seem to be ignoring the definition of a market correction which by definition is a drop of 20%

How Quickly did we recover from 2018’s Drop?

By April of 2019, the S&P500 had fully recovered from the 20% drop that occurred from late August through December of 2018.


Do you see any other times in history that might be a guide?

I do see some parallels with 9/11 in that the world as we previously knew it seemed to be changing and we faced fears we had not seen before.

Due to fear and concerns over the financial firms inside the World Trade center the stock market stopped trading until 9/17. The NY stock exchange opened on 9/17 with a 7% loss and continued to lose over 14% for the week. It was one of the largest 5 day losses the market had seen.

Less than one month later the stock market had regained its pre 9/11 levels

What if we have another 2008?

What do I mean by 2008? I mean another “worst stock market of our lifetime” period. How long did it take to recover from the 2008 stock market?

The recovery came swift and a return to value

  • 40% stocks/60% bond portfolio recovering by November 2009
  • 60% stocks / 40% bond portfolio recovering fully by October 2010
  • The 100% stock S&P500 recovered full by March 2012

The Takeaway

Time periods like we are experiencing now are very challenging for investors. Time periods such as we are in now are tempting to feel that there is no relief in site. However, looking at history, we can see that the stock market, our economy, and country have recovered from even the worst of time relatively quickly. Its persisting through times such as we are in now that allows up to capture the upside of investing. Market timing is tempting and “feels right” when times are rough, however, research has shown us that market timing is extraordinarily difficult (need to be correct over 70%-80% of the time) and in most cases, trying to time the market has hurt our portfolio returns. We are reminded of the “average investor” returns the past 20 years from this slide:

Had the average investor since 1998 simply picked any other the other asset classes and stuck with it, they would have performed better. Further, they did not even outperform inflation.

I will continue to be vigilant in monitoring your portfolios and to ensure we are acting in prudent matters. Please do not hesitate contacting me if you have any questions.

Mortgage Rates Likely to Drop

Mortgage rates dropping

10 Year Treasury Approaching 1% could result in lower 30 year mortgage rates in history

Mortgage rates dropping

The 10 year Treasury Impacts the 30 Year Mortgage

The rates on the 10 year treasury bond is linked closely to 30 year mortgage rates. The simple reason is that mortgage bonds (bonds issued by quasi government entities Fannie and Freddie) compete with the 10 year treasury bond with investors. If the 10 year rate drops, the mortgage bond rate is not far behind and then mortgage rates to consumers are not far behind.

Why have rates not dropped already

Simply, its too soon. The 10 year dropped extremely quickly and mortgage bonds take time to issue and until there is stability in rates (meaning its expected to remain relatively stable), then lenders issuing the bonds will feel more comfortable locking in home refinances at lower rates. Current mortgage rates are around 3.5% but a 1% 10 year, implies that we could see rates approach 3% for 30 year loans.

What should I do?

I am of the belief that any time you can enough of a rate advantage to be worth your time in filling out the paperwork than your should refinance. If rates are better today than your current rate than refinance today. I would not wait for rates to get better. While the 10 year dropped dramatically in a week, it can just as easily reverse course.

One quick item to note. I generally believe in zero cost refinances. You will take a slightly higher rate but the costs to close on the loan will cost you nothing. It makes the math MUCH easier to compare with your current loan (is the rate less?). It also removed the “how long do I have to keep the loan to make the refinance worthwhile” because you immediately benefit from the lower rate. I have also found that those people that pay points to get a lower rate or even who have to pay out of pocket to refinance, are reluctant to refinance their mortgage again even when there is clear advantages.

Its the old “sunk cost” aversion. What that means, is that I paid $3k for my last refinance, I don’t want to lose that money by refinancing. The reality is that 3k is gone and part of the last mortgage. In finance and accounting we call it a sunk cost. It called a sunk cost because it should not affect a future decision to refinance because that cost affect your previous loan and not your current loan.

By taking a slightly higher rate and receiving “negative points” (cash back from lender), the refinance costs you nothing and you can continue to refinance as rates drop without the costs of the loan hurting you.

Any clients should call me whenever thinking about a refinance and I can help advice you on the best loan for you and your goals. I do not sell loans but help you sort through and decide on the best course of action with whomever you use for your refinance.