Market Troubles

Trouble

“In this world you will have trouble. But take heart! I have overcome the world.”

John 16:33

While the Bible does not speak specifically about Coronavirus outbreaks or stock market plunges, it certainly does speak about plagues and pestilence, as well as periods of adversity and trouble. So, with that in mind here are some thoughts on the recent stock market sell-off from the vantage points of investment history, behavioral finance, and biblical wisdom.

In my many decades of investment experience, I have seen my fair share of market turbulence and even many “crashes”. During my career, there have been all matter of reasons to spark stock market sell-offs, however, this is the first time in my experience that a pandemic scare has been the catalyst for a significant stock market plunge. Yes, in the past, investors have expressed worries about health-related issues (Ebola, SARS, etc.), but nothing medical that I can remember has had the sort of impact that we are currently seeing. Not being a medical expert (although I am a “doctor”!), from my limited perspective, it seems that the pandemic concerns have legitimacy and therefore the potential to cause significant human and economic damage. While we may have some feelings of despair in the face of this challenge, as Christians, we can pray with confidence to God that the coordinated global forces of human ingenuity being brought to bear on this calamity will prevail. Even with that envisioned success, however, going forward, this new type of risk, global health, will now be a top-of-mind concern for investors for years to come.

While, most importantly, caring for and praying for those who have been afflicted (“Weeping with those who weep” – Romans 12:15), prudent investors nevertheless do need to consider the market implications of this medical emergency.  Stock market corrections (generally viewed by investors as the S&P 500 being down -10% from the prior high) are very common, coming on average every 11 months. Bear markets (generally viewed by investors as the S&P 500 being down -20% from the prior high) are less frequent, but still have visited investors on average every 44 months. With that context, it is important to remember that this 11-year bull market has been the longest in the history of the US stock market. That combined with recent all-time stock market highs, stretched valuations, record low bond yields, anemic economic growth, polarized political environment, and weak earnings growth, the probability of entering a bear market is material.

However, just because there is a heightened risk of a bear market does not mean that investors should reflexively “bail out.” Biblical wisdom certainly supports keeping one’s cool in the midst of adversity: “Do not fear, for I have redeemed you; I have summoned you by name; you are mine” (Isaiah 43:1). Further, while not directly addressing investment timing decisions, the Bible has many admonitions about making predictions and attempting to know the time and place of events.

Additionally, the evidence of financial history demonstrates that a strategy of “timing” the market by getting out when the market appears to be trending down and then attempting to adroitly get back in when the markets appear to have bottomed is fraught with risk, not the least of which is the necessity of being “right” twice. Additionally, research studies from Dalbar indicate that while the historical annualized return of the stock market (S&P 500) over the past 30 years (ending 12/31/18) is 10.0%, the average mutual fund stock investor return during the same time period has been just 4.1%. The biggest contributor to that underperformance differential was investors’ failed efforts to “time” the market, oftentimes being sucked into the market’s euphoria near market tops and “buying high,” while subsequently succumbing to despondency near market bottoms and “selling low.”

So, what is a biblically responsible investor to do in these circumstances? If an investor has a longer term (> 5 years) financial goal(s), then continuing to have a meaningful level of one’s asset allocation in the stock market is a prudent strategy despite the current market turmoil. In fact, further stock market weakness would likely be an opportunity to deploy more money into equities, i.e., buying low when stocks are on “sale.” Further, investors should consider the current market dislocations as an opportunity to “rebalance” their portfolios by trimming down slightly those assets which have performed better (e.g., bonds), and redeploying those proceeds into the recently beaten down asset sectors (e.g., domestic and international stocks, as well as commodities). Lastly, and most importantly, biblically minded investors should strive to keep these heartfelt concerns of life in their eternal perspective, including John 16:33: “I have told you these things, so that in me you may have peace. In this world you will have trouble. But take heart! I have overcome the world.”

Sources: Standard & Poor’s, Inspire Investing, and 2019 Dalbar Quantitative Analysis of Investor Behavior (2019)​

Dr. Erik Davidson, CFA

Dr. Erik Davidson, CFA

Dr. Erik Davidson, CFA, is the Chief Economic Advisor for Inspire Investing. Previously, Dr. Davidson served as the Chief Investment Officer for Wells Fargo Private Bank, overseeing more than $200B in assets. Dr. Davidson holds a doctorate degree from the DePaul University’s Kellstadt Graduate School of Business with his research focus in Behavioral Finance.

LinkedIn

*Advisory Services are offered through CWM Advisors, LLC dba Inspire, a Registered Investment Adviser with the SEC. All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

7 replies
  1. Avatar
    Heidi Edmunds says:

    Thank you for your thoughts and insights into this volatile time. People are frightened by what they fear and the possibilities fear itself brings. Media has had a heavy hand in creating this panic which has therefore affected the stock prices. Though there is an understandable concern about the virus, people are purchasing and hoarding supplies that they shouldn’t be. Our front line healthcare workers are the ones who will be caring for sick patients coming through emergency room doors and need to be protected so they can continue to work. All I can say is good hand hygiene, plenty of rest, stay home when ill, and don’t panic! The stock market will recover as it always does.

    Reply
  2. Avatar
    William Feus says:

    I’m reminded of something Minnesota Vikings QB Kirk Cousins said after a playoff win this past season: “Win or lose, God is still on the throne, and I take comfort in that.” Markets go up, markets go down, but God is still on the throne. We should all take comfort in that. Investing for the long-term we must accept volatility; living our lives in light of eternity, in a fallen world, we encounter all manner of “volatility”–health issues, loss of employment, parenting challenges, marital strife, and even global pandemics. “In the world you will have tribulation,” Jesus tells us–not “might” have tribulation, but “will” have tribulation. “But take heart,” the Lord continues, “I have overcome the world.” If you are in Christ, you, too, will overcome the world and it’s tribulations.

    Reply

Trackbacks & Pingbacks

  1. […] recent bull market and economic expansions with valuations starting to show signs of excess (see Trouble), we were not of the view that equities had reached bubble territory. In our opinion, the cause for […]

  2. […] recent bull market and economic expansions with valuations starting to show signs of excess (see Trouble), we were not of the view that equities had reached bubble territory. In our opinion, the cause for […]

  3. […] we had expressed (see Trouble) concerns about the record length of the most recent bull market and economic expansions with […]

  4. […] a follow-up to my piece, Troubles, a few weeks ago, I offer you some of my further thoughts on navigating the current market […]

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *