Renewed Uncertainty in Global Markets
Viruses commonly weaken immune systems, and the world is now experiencing this effect on a massive scale. With the global economy blindsided by the spread of Covid-19, investors are increasingly susceptible to the potential impact of other market externalities as they view their investments through a more skittish lens.
With plunging stocks and oil prices throwing the global economy into chaos, the Fed recently cut interest rates by half a percentage point—its biggest single cut in over a decade. However, this move has not been enough to assuage the U.S. market, and many market participants are anticipating another quarter-point cut at the central bank’s meeting this month, potentially followed by another move in April. With the central bank running out of room to further cut rates if things worsen, expectations for the future remain uncertain, and in terms of commercial real estate the U.S.’ retail, hospitality, travel, manufacturing, and supply chain/logistics sectors will likely be the most impacted by recent events. The net impact remains uncertain due to the fact that industry data is typically reported on a quarterly basis and commercial real estate leasing fundamentals are typically a lagging indicator.
With all this in mind, it’s important for investors to understand the historical context of recent market corrections as they determine their next moves. Below is a primer on market downturns over the past few decades as well as some thoughts on how to protect your investments.
Is this a healthy market correction or the start of a bear market?
While definitions vary, a market correction is commonly understood to have occurred when a major stock index such as the S&P 500 or Dow Jones declines 10-20% from its most recent peak. Healthy corrections return price levels to their longer-term trend and are a stressful but expected occurrence within the market. However, for most investors the primary concern during a market correction is that the decline harkens the start of a full-blown bear market, which is an extended period of time in which the market falls by 20% or more.
While it’s not possible to effectively predict whether a correction will reverse course or descend into a bear market, it’s important to note that historically, most corrections have not turned into bear markets. According to the below data provided by global financial services firm Morningstar, Inc., of the 22 market corrections which have occurred since November 1974, only four have led to full-blown bear markets.
Source: Schwab Center for Financial Research with data provided by Morningstar, Inc.
*1980: after nearly a decade of sustained inflation, the Federal Reserve raised interest rates to nearly 20 percent, pushing the economy into recession.
*1987: the interplay between stock markets and index options and futures markets, with computerized “program trading” strategies swamping the market and contributed to the Black Monday crash.
*2000: The infamous dot-com bubble burst followed a period of soaring stock prices and exuberant speculation on new Internet companies, which were given outsized valuations relative to traditional price-seeking mechanisms and traditional company benchmarks.
*2007: The U.S.’ growing subprime mortgage crisis resulted in an avalanche of borrowers unable to meet their obligations as scheduled, which eventually snowballed into a general financial crisis endangering systemically important financial institutions across the world.
Over the past four decades, bear markets have seldomly occurred even when the market dropped more precipitously than in recent market declines. Furthermore, on average past bear markets have lasted roughly 17 months, which is far shorter than the average bull market length of 6.3 years, as evinced by the Bloomberg data below.
Source: Schwab Center for Financial Research with data provided by Bloomberg.
With bear markets prone to end as abruptly as they begin, we believe that investors can benefit from remaining calm and systematically reassessing their portfolio positions through a long-term perspective, rather than simply pulling their money out of the market out of fear.
What should you do now?
Given that the recent interest rate cut was the first emergency rate cut since the 2008 Financial Crisis and the full impact of Covid-19 is yet to be known, investor concerns are legitimate and understandable. However, in some instances lower interest rates can benefit the commercial real estate sector, and worrying excessively about the prospects of a bear market can be counterproductive. The key to focus on the factors that are within your control. To that end, here are some suggestions on what investors should consider:
- Lay everything out: if you are anything like most investors, you likely have a decent grasp of your portfolio distribution and performance but are not in the habit of regularly consolidating and reviewing all your positions in detail. If the current market correction concerns you, it can be helpful to draft or revise a thorough financial plan which maps out your specific financial goals and decision triggers, to make it easier to stay the course when markets get bumpy.
- Assess your risk tolerance: the 2010-2019 period coincided with one of the longest bull markets in history, and it’s relatively easy to take risks when all boats appear to be rising with the tide. However, when the market heads south investors should be more mindful of their asset allocations and whether or not they have sufficient downside protection in the event of a lengthy downturn. An honest and thorough evaluation of your risk tolerance entails taking your life stage into consideration, as younger investors can generally afford to engage with the market less conservatively than investors nearing retirement.
- Consider rebalancing your portfolio: market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to rebalance at regular intervals.
A Return to the Fundamentals
There is no secret recipe for how to come out on top after a market correction, but it’s important that you review your investments’ underlying value drivers and decide for yourself whether the fundamentals remain sound. By the end of 2019, expectations for the commercial real estate sector were substantially more positive relative to sentiments in the prior year, as revealed in real estate advisor Robert Charles Lesser & Co’s recent year-end survey.
Source: RCLCO 2019 Year-end Sentiments Survey
While Covid-19 panic has disrupted this outlook, we believe that the underlying market potential remains sound. Despite global concerns investment in U.S. commercial real estate from offshore groups is expected to increase significantly this year. Furthermore, according to National Real Estate Investor there are some indications that commercial real estate is potentially less reactionary than the stock market.
While returns on private placements in commercial real estate often compare favorably to public markets, past performance is no guarantee of future performance. Furthermore, there is always a chance that the past three weeks of market turbulence may turn into a prolonged downward trend that lasts through the end of 2020, especially given the impact on many key industries that are reliant on Asian supply chains. This is why we encourage investors to assess each of their investments holistically and balance their expected returns against more cautious considerations.
How Can iintoo Help?
Here at iintoo, we are dedicated to delivering you more clarity on your investment process, particularly during periods of turbulence when it is crucial to understand all of your options. We understand that these decisions are often difficult, which is why we go through great lengths to vet each and every deal we offer our members through our extensive, multi-layered due diligence process.
As always, we encourage our investors to stay informed and approach their investment strategies with their long-term financial goals in mind. To that end, feel free to explore our offerings and reach out!