Market Summary

• External shock of the Coronavirus is comparable to the September 11^th  attacks.
• Markets were able to recover from that external event to reach new all-time highs.
• Certain sectors (such as the travel and entertainment industry) will be hit harder than others, just like with September 11^th.
• Governments and central banks around the world are doing everything in their power to support business and consumers during this pandemic.
• We are confident in the potential to see a healthy recovery.
  

_{Disclaimer: As your financial advisors, we are not here to give health advise as we are not qualified to do that.  We strongly suggest you listen to medical experts when dealing with the matters of Covid-19, as we want your health and safety above all else.}

CURRENT EVENT:

As of last week, Covid-19, also known as the Coronavirus, has officially been named a global pandemic by the WHO (World Health Organization), the first one since 2009 with the H1N1 swine flu outbreak.  Covid-19 has caused an unexpected disruption in the world economy, something that nobody could have reasonably foreseen happening even six months ago and it has greatly impacted the financial markets, ending the 11-year bull run in equities.  Covid-19 has shut down supply chains, reduced consumer demand, and put some countries into full-on quarantines. 

These are difficult times as an investor because astute investing comes along with trying to reduce the uncertainty in your portfolio by understanding potential risk, and then consciously deciding which risks you want to be exposed to.  Since this virus has spread so rapidly in our globalized economy, it has been difficult for the market to adequately understand the situation which puts us in an uncertain environment, rather than one where market participants can logically understand inherent risks.  This rapidly changing economic and epidemiological landscape is the reason why there have been such violent swings in the market. 

Another source of uncertainty comes from the nature of the virus itself.  Scientists are still trying to figure out the transmissibility rate and death rate of the virus, although both look to be higher than the seasonal flu.  This rapid transmission throughout the globe has caused countries to take unprecedented steps in combating the virus.  Understandably, these steps have put the economy as second fiddle to the public health but that has lowered the estimated global growth rates, which in turn lowers the valuations in the financial markets.

The United States government and Federal Reserve are doing everything in their power to keep the economy afloat during these difficult times.  On March 17, the Trump administration announced a comprehensive $850 billion spending package to combat the economic effects of the virus.  This spending package will have roughly $500 billion tied to a payroll tax cut, $250 billion coming from the Small Business Administration for loans, and another $58 billion would be directed towards the airline industry.  This is including the initial $8.3 billion fiscal policy and another $50 billion emergency spending package after the United States declared a state of emergency.  The Federal Reserve is doing everything in their power through slashing interest rates to a bound of 0%-.25%.  They also announced $700 billion in Quantitative Easing, where they’ll buy mortgage backed securities, treasuries, commercial loans, and other financial instruments.  Financial institutions announced that they will suspend their share buyback programs in order to have adequate liquidity during these times as well.

This is economic support that we have not seen since the 2009 financial crisis but this is different because this crisis is coming from an exogenous shock to a healthy economy whereas the 2009 financial crises came from an endogenous (inside) sickness within the economy (Bad-bets by banks on mortgage-backed securities).  The fact that this support is coming to rescue an economy that was previously health gives us confidence that once this virus is under control, there is the potential to see a healthy recovery.

COMPARABLE TIME:

I want to walk you through the last time we had such violent market swings from an exogenous (external) shock, September 11^th, 2001.  Obviously, back on September 11^th, 2001, terrorists committed an atrocious crime against the United States and humanity at large; but that is not the focus of this piece.  The focus is on how that terrible exogenous shock affected the financial markets.  Let’s take a look at what happened during those times:

• The NYSE decided to close from September, 11^th to September 17^th which was the longest market shutdown since 1933.
• When markets opened on September 17^th, they dropped 7.1% that day. By that Friday’s market close, the Dow was down over 14% and the S&P 500 was down 11.6%.
• 18,000 small businesses were destroyed or displaced after the attack. Overall, around 430,000 jobs were lost in NYC alone and there was $2.8 billion in lost wages over the next three months.
• The federal government provided $11.2 billion in assistance to the NYC government and the following year they provided another $10.5 billion to aid in economic assistance and relief.*

As you can see, the attacks wreaked havoc on NYC, but what it mainly did was change the way consumers acted.  The airline industry did not return to September, 2001 flight numbers until July, 2004, but the point is that they did recover.  If you are investor with an extended timeline before retirement, then you can look at depressed valuations and understand that it can be more of an opportunity, rather than a threat.

The markets dealt with the Black Swan event of September 11^th by having a setback, but in the 18 ½ years since, the S&P 500 has gone from a level of 965.80 on September 21, 2001; 10 days after the worst attack on terrorist attack in American history, to 2,529.19 as of March 17, 2020.  As you can see, over long periods of time, riding out the difficult times by staying invested has a high probability of turning out to be the prudent financial decision. It is easy to look at hindsight and say that it is easy to make the decision to ride out the difficult times in the markets.  The ugly truth is that dealing with market volatility can be difficult on an emotional level and that is what we are here to help you with at K2 Financial. 

Financial markets will always be at risk of Black Swan events.  By definition, Black Swan events are things that have such a low probability of occurring that they are almost impossible to accurately prepare for.  These low probability, high impact events, are one of the main reasons we strive for properly diversified portfolios at K2 Financial.  Our two main goals as stewards of your money is to make sure you have the capability to make rational decisions during emotional times and to help you reach your financial goals.  These two goals go hand in hand and we are here to help you through every step of your financial journey. 

If you have any questions, comments, or concerns please feel free to reach out to your financial advisor.

<sub>* https://en.wikipedia.org/wiki/Economic_effects_of_the_September_11_attacks

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Lincoln Investment. Past performance is not guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss. S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets. Investors cannot directly invest in an index.</sub>

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