The X’s & O’s

Brent, Matthew & Joshua discuss the stock market decline, the risks of the coronavirus and stocks that are moving up because of the threat.

Listen to the podcast episode…

The Hosts:

Brent Pasqua, Matthew Theal and Joshua Winterswyk

 

Transcript:

Brent Pasqua: Welcome to the Retirement Plan Playbook. I am Brent Pasqua and I’m here with Matthew Theal and Joshua Winterswyk. On the show today we’re going to discuss this massive drop that we’re having in the stock market right now due to the coronavirus. The S&P has dropped over 7.35% from its recent high as of February 25th, which is Tuesday afternoon.

Brent Pasqua: Matt, I want to get your opinion. I thought this virus was contained based on just that cruise ship off Japan and also in China. What has really happened to cause this panic?

Matthew Theal: Yeah Brent, it has been a panic in the last four to five days and I did think it was contained as well, and it does kind of look like it has been contained in China. The number of new cases they are reporting looks like it plateaued and is maybe starting to drop a little bit. But what’s causing this recent panic is Europe. So on Friday it was announced that Italy had about five cases and that’s now jumped up to a couple hundred. And the problem with that is, as Josh knows, because he’s traveled to Europe, it’s very easy to hop on a train and get to most of Europe. Everything’s connected. They don’t even check passports. So now we have cases in Spain, Austria, Croatia, Switzerland and France, not to mention there’s quite a few cases in the Middle East as well, so it’s starting to grow pretty rapidly.

Brent Pasqua: Are they concerned more about how this affects people health-wise or really the economical challenge that it puts businesses in?

Matthew Theal: It’s probably a little bit of both. But the reason the stock market is declining is because of the economics of this. I mean, the health is obviously another factor, but it’s economics.

Brent Pasqua: Is it a concern, do you think, that the CDC came out today and said that there’s a possibility that they’re going to shut down schools and get prepared for businesses to work from home? Is that also contributing to some of this panic?

Matthew Theal: It could be. I mean, the US has had a really lagged response on the coronavirus, so it’s good to see the CDC out saying something. They said a pandemic is likely, so that is some cause for alarm and I think that it makes sense for people to take some precautions in their everyday life.

Brent Pasqua: Josh, what exactly is this coronavirus?

Joshua Winterswyk: So I’m not a doctor, just good to throw that disclaimer out there, but the coronavirus is a virus that jumps from animals like bats, pigs, mammals to humans and also birds, and it causes a respiratory tract infection in humans. And I want to say I was reading too that it can be gastro as well, right? I think this strain of the coronavirus can kind of affect your gastrointestinal system.

Brent Pasqua: Because I think when it first started coming out, the symptoms were limited in what we knew people were actually feeling, but it sounds like more symptoms are starting to be described as it’s starting to advance. Is that true?

Joshua Winterswyk: Yeah, it’s what it sounds like.

Brent Pasqua: Matt, do you want to touch more on the symptoms?

Matthew Theal: Yeah. So the symptoms are basically your everyday flu, right? It’s a fever, it’s a cough, it’s ache and pain, maybe you feel a little shortness of breath, some people report nausea or diarrhea. And to most people, it is just a regular flu who get it and they become fine. The risk is to the elderly or people who have immune deficiencies or who have some kind of respiratory problem. That’s where we see the death and where we do see the alarm.

Brent Pasqua: Being a parent who has young kids, I mean, it doesn’t appear that this has a tremendous effect on kids, or what have you heard so far?

Matthew Theal: According to my research, it hasn’t killed a single kid. Most of the deaths have been elderly people.

Brent Pasqua: Right, respiratory issues or people that are struggling with other elements, it seems like.

Matthew Theal: Exactly.

Brent Pasqua: Josh, how easy does the virus spread?

Joshua Winterswyk: Researchers estimate that infected person can transmit the virus anywhere from 1.5 to 3.5 people on average.

Matthew Theal: That’s pretty insane.

Brent Pasqua: Yeah. I don’t really know, and maybe you guys can elaborate, I really don’t know how that compares to other viruses, but that seems to be spreading at a pretty alarming rate. And if you look at some of these other viruses in the past, like SARS and MERS and all of that, it seems like their contagious rate was a lot lower, but with this, people are spreading it at a much more rapid pace.

Matthew Theal: Yeah. From my understanding, I think the virus spreads a rate that’s four times faster than the normal flu, though in a way, you could make the argument to most people this is just like a normal flu because they seem to recover pretty fast from it.

Brent Pasqua: Yeah. And I’m curious to see how quarantining cities is actually going to help this situation and if it really does. I mean, is there other way it spreads? Can you really quarantine an entire population of people and then stop the spread? I mean, historically, I don’t know if that’s even worked before.

Matthew Theal: I don’t know if it has, but we’ll know in a couple of days because that’s what the Italians are doing. If you Google that or look up pictures, they have quarantines, and checkmarks, and checkpoints, and essentially it sounds like they’re kind of locking down the areas where they’ve been the worst hit.

Joshua Winterswyk: We’ll learn a lot from just it kind of spreading to different countries because the information only coming from one country, we don’t know how great that information really is. So if you can take one positive from it is that other countries and how they’re treating it will bring more light and more education and more information about the virus.

Brent Pasqua: Yeah. How dangerous is the new coronavirus, Matt?

Matthew Theal: It appears to be less deadly than the SARS. When was SARS? Is that the early 2000s.

Brent Pasqua: No, I think it was more recent. Well maybe, yes, SARS was around there.

Matthew Theal: So SARS killed 10% of people that had it, coronavirus kills under three. So coronavirus’ last number I had was 2.9%, and that number was taken from the Wall Street Journal. So it’s a lot less deadly, I just think there’s more people getting it, which is creating the fear.

Brent Pasqua: Yeah, it’s infected way thousands and thousands of more people at a much more rapid rate and I think they have really no handle on it at this point.

Joshua Winterswyk: SARS, I got the info. SARS was 2002.

Matthew Theal: Oh, 2002, so early 2000s. It’s kind of neat. I have this chart up and it shows all the cases in the world as of February 25th, a Tuesday. And one thing that’s interesting is warm climates, it doesn’t seem to be spreading as fast and there’s no deaths. For instance, there’s no deaths in Singapore and they have 91 people reported infected. But Iran has 95 people, 95 cases and 16 deaths already.

Brent Pasqua: And is that due to healthcare systems or we think that’s more weather and climate related?

Matthew Theal: Maybe yes to all, a little of both.

Joshua Winterswyk: If someone wanted to look up that chart, because it is a good chart that you pulled up, where can they find it?

Matthew Theal: I actually found it on Twitter, but it was a Bloomberg reporter who tweeted it out, so maybe going to Bloomberg would work.

Brent Pasqua: I think the thing that’s sort of interested me the most about a lot of this, especially over the last two days, is what has caused the stock market to finally go into this panic when we’ve actually known that this has been going on for six or seven almost weeks now? I mean, it really started to hit hard to the media in January, but there was also some words that had been coming out about this early on and even towards the end of the year, but what has made this actually hit the market and just this last two days’ downward effect?

Matthew Theal: It’s kind of crazy how the stock market works because I would agree with you, when they shut down China, I was like, there’s no reason the stock market should still be going up right now. China’s such a big economic player, they import and export so many goods and their economy is shut down. They basically told no one to go to work for two weeks and the market didn’t react. So I think that’s what we’re finally seeing now. The stock market finally got the hint that this is bad and it’s spreading and not being contained, so a global recession is on the table. Like do you want to travel to Italy today?

Joshua Winterswyk: I think it was Italy. I mean, that was when that Italy news broke. I think that’s when you really saw that change with the media’s information and when that stock market actually kind of turned, was once you saw that jump to Europe, like you talked about, of how catastrophic this could be by getting to Europe.

Brent Pasqua: But why does it take so long to hit the market? Because if we saw the contagious factor be so high and we saw it spreading through China pretty easily and quickly, I mean it was spreading like wildfire, and the markets weren’t really reacting. It had one bad day or two bad days in the last five or six weeks in the market, but then all of a sudden the day it gets to Europe with a few hundred people and all of a sudden now we have this strong feeling that it’s going to have this global impact. I’m curious why though. Why now?

Matthew Theal: I mean, there’s just no controlling the market, I mean, it does what it wants to do. And I know that’s kind of a weird answer but I’ve been doing this since 2003 and there’s never really a true rhyme or reason to the stock market. I mean, in 2007, everyone knew there was a credit crunch coming, everyone knew housing was overvalued, people knew there was a big debt problem in the economy, but it took till 2008 for the market to start actually crashing.

Brent Pasqua: Right. What I think is interesting too for investors and clients and people who have their retirement saved in the market is when you get to these times in the market where we’re in unchartered territory, right? We’ve never really had a virus in modern history start being this contagious and spreading this rapidly. SARS and MERS were much more smaller number, Ebola was a much smaller number. We’ve never seen something like this before, and when something really starts to happen where there’s so much uncertainty about how this actually plays out, that’s when I think some of this panic sets in, and we saw in 2008, right? It was one thing led to the other. We’ve never been in this debt crisis before. Here’s how it plays out. And you’ve seen it historically across time that when we’re in these uncharted territories, we’ve never had this stuff happen historically, then this real panic sort of sets in in the market. Because if I ask both of you like how does this coronavirus thing play out? What’s its longterm global impact? There’s nobody that can answer that question right now because I mean, nobody knows.

Matthew Theal: Yeah, it’s uncertain. And that’s one thing that the stock market hates is uncertainty. That’s why the market usually drops right before a presidential election because it’s uncertain what the outcome is.

Joshua Winterswyk: But how many times are we really certain?

Matthew Theal: Never.

Joshua Winterswyk: So markets are volatile?

Matthew Theal: Yeah, they are. And when we were down, I think your number that you gave at the start of the show was 7.5%.

Joshua Winterswyk: Right.

Matthew Theal: That’s normal. I mean, you should be expecting the stock market to fall at least 20% every year, and if you can’t take 20% pain, then you need to readjust your portfolio because historically, that’s been the average drop.

Brent Pasqua: Yeah. And I think what is also interesting too is seeing how people actually start to continue to react out of this. Because if you look back also historically, and you see all of these large gains that had happened last year and some of the years past, like to start the year, we were cruising along, besides a little bit that happened in Iran, we were kind of just cruising along, but after a big year, there’s something always that seems to happen or a lot of times will seem to happen that disrupts what we think is going well, and this is just another one. But that just means the world is always changing, I guess.

Matthew Theal: Yeah, yeah, I agree.

Brent Pasqua: Josh, how do you think or how will the virus impact an individual’s retirement, because a lot of people’s money is invested in 401(k) plans or different plans?

Joshua Winterswyk: The first thing I think of, and Matt, you had kind of mentioned it, it’s really kind of, instead of panicking, reassessing how much risk you can take. Because if the market losing 7% right now after such a great year last year and a great start of the year, if losing 7, 8% right now is hard to stomach, now we need to reassess how much risk you’re actually comfortable with taking.

Matthew Theal: And if someone has a globally diversified portfolio, which is what we preach to our clients to do, that means they have bonds, and bonds have been on an absolute ripper since this started. I mean, I think interest rates are at a 30 year low, is that correct, or even at an all time low?

Joshua Winterswyk: Yeah, we’re at lows again interest rate wise too.

Brent Pasqua: And a lot of clients, if they are wondering what happens in this time period, and we go over this with our clients all the time when we are in a downmarket, if a client needs cash for income, we’re not selling their stock positions right now to create income. We’re utilizing their bond positions right now if they need money that’s converted to cash. So really, it doesn’t pose a trigger for us to make any type of a solid reaction that has to be done or a scared reaction.

Matthew Theal: Yeah, exactly. Sell high and buy low, right?

Brent Pasqua: Absolutely. So Matt, what stocks are going up because of coronavirus right now?

Matthew Theal: Yeah. So I don’t think it’s wise to invest your money based on the coronavirus or to allocate part of your portfolio to coronavirus stocks, but we have seen some interesting stocks going up, and I’m probably going to butcher this company’s name, but the first one is Moderna.

Brent Pasqua: Yes.

Matthew Theal: Is that correct?

Brent Pasqua: Yeah.

Matthew Theal: And they have a drug in trial right now, some sort of vaccine. It’s been fast-tracked but it doesn’t sound like it’ll be anytime until that gets approved.

Brent Pasqua: Yeah. It sounds like this is the company that the CDC said is kind of leading the charge in the vaccine, right? But I mean, this virus could be dead by the time it ever has a vaccine out. Is that right?

Matthew Theal: Yeah, from my understanding, that’s correct. So that sucks up a lot. Another interesting one that always goes up whenever the market goes down is gold, gold ETF. But I mean, what are you going to do if this gets worse? You’re going to take up your brick gold and shave some off to go buy food at the grocery store? There’s not going to be any food at the grocery store for you to buy with the gold, so kind of useless there. This is a no brainer. What about Clorox with the bleach wipes?

Joshua Winterswyk: Sure. We’ve been using them here.

Matthew Theal: Oh yeah. We bleached the conference room today pretty good. And then two places that you wouldn’t really think of that are newer is Zoom Media who does video conferencing for when we do screen sharing with clients.

Brent Pasqua: That’s interesting.

Matthew Theal: And then the texting messaging app, Slack.

Brent Pasqua: Is that because companies are possibly gearing up to have people working from home if this gets out of control?

Matthew Theal: Yeah, I think we’ll see a lot more people working from home, and I mean that’s what the CDC already suggested. So hopefully, large corporations start to let employees work from home.

Brent Pasqua: Yeah. And so that sounds like that is a real possibility that large companies could be working from home and they’ll be using this technology to do their work tasks, but just not be in person to avoid spreading it from the workplace.

Matthew Theal: Yeah, they will. And then along the same lines is the Peloton, they make the exercise bike with the TV on it.

Brent Pasqua: Oh, yeah.

Matthew Theal: Have you been on one of those, Brent?

Brent Pasqua: I’ve been on the bike before. I haven’t tried the treadmill, but they’re neat technology, that’s for sure.

Matthew Theal: Yeah, I tried one on vacation in Hawaii. Josh, have you tried one?

Joshua Winterswyk: No, I haven’t tried that Peloton actual branded bike.

Matthew Theal: They’re pretty cool. But yeah, that stock’s been going up. Full disclosure, I do have a position in it, but I’ve owned it almost since it came public, so I didn’t buy it because of coronavirus. That’s going up. I guess, same thing. People are going to do less group exercising.

Brent Pasqua: So that’s why it’s going up as people are going to start avoiding the gyms and start working out at home essentially?

Matthew Theal: Yeah.

Joshua Winterswyk: This is a lot of speculation.

Matthew Theal: It is a lot of speculation, but it’s fun.

Brent Pasqua: Yeah. This is the fun part of it. I mean, this is, I guess the mentality of what people are doing in the market. I mean, why else would Peloton be going up right now and there’s all this panic in the markets when their only stock is up?

Joshua Winterswyk: When everything’s going down, yeah, I think that’s fair. There’s a lot of forecasting, a lot of speculating.

Brent Pasqua: Yeah. But you know what, like I said before, we are in this new territory, and even people on TV, no matter what the articles are that you read, there is a lot of speculation going on right now on what’s to take place.

Joshua Winterswyk: And I think the media fuels it.

Brent Pasqua: Absolutely.

Matthew Theal: Oh yeah. You saw at CNBC, the market was down … they always say 1,000 points, which isn’t that big of a percentage drop, and they’re doing their CNBC market turmoil special. They had the whole crew out, Kramer, Josh Brown.

Joshua Winterswyk: Why do they always report points when the market’s down?

Matthew Theal: Because it freaks people out.

Joshua Winterswyk: Like it’s always the amount of points on the screen.

Brent Pasqua: Yeah. I don’t know why they don’t say it in percentages, because percentages are more relative to what happened historically.

Joshua Winterswyk: Yeah. I mean, how do you relate 1,000 points to my investment portfolio? I mean, you’re having to go through a couple of different variables to come up with how much you actually are affected.

Brent Pasqua: Right. And 1,000 points 20 years ago was unheard of, right?

Matthew Theal: Yeah. I think that was bigger than the crash in 1987 on a points basis. They’re just trying to get ratings, everyone’s ratings, well, for those of us who are still watching cable TV.

Brent Pasqua: But it is entertaining, right? I mean, it can be somewhat entertaining if you like the news.

Matthew Theal: Yeah, I guess.

Brent Pasqua: But you have to know the difference between entertainment and what’s reality and not get scared over it. I mean, which brings up the last question that I really have is, how really terrified or concerned are you with what’s going on right now in the market and with the virus.

Matthew Theal: I’m terrified. I’m not really terrified of the virus, but I’m terrified of the way people respond to these things. So if you Google grocery stores, Italy, you’ll see the stores have been absolutely raided, there’s people waiting in line, and this is really just for a common flu that has a slightly higher death rate than we’ve seen for a flu, right? We know it doesn’t really kill people who are under, call it 60 years old and healthy. So I’m terrified. I don’t want to get this, obviously, I don’t want to be sick, nobody wants to be sick. But it’s really the human and government response. And I also don’t want to be quarantined. I mean, do you want to be quarantined?

Brent Pasqua: No. Only if it protects my family would I be wanting to do that. I mean, everyone wants to live their normal life and they don’t want to live in fear. Why should we? I guess, is our concern with the supply chain getting cut off from China right now, is that part of the concern too?

Matthew Theal: Yeah, it’s the whole reason the stock market’s going down is everyone thinks that we’re just going to quarantine the whole world most likely, right?

Joshua Winterswyk: So not even now the supply chain in China, but again, Italy and it spreading there kind of opened up a whole nother can of worms and whole nother supply chain sector. So I think that’s why it’s become even bigger deal over the last few days and with the market and just that whole Europe opened up a lot of different opportunities for this disease to spread.

Brent Pasqua: Does it really concern you that much with the virus or do you think this shall pass?

Joshua Winterswyk: No, after doing a lot of reading too … I mean, I was reading some research that we have one of these types of influenza outbreaks a year, well, in some place in the world. I’m not too concerned, and after reading they’re saying that it’s relatively low risk health-wise, but I am curious because it is unpredictable. So the unpredictability just makes you think, are you prepared for any sort of disaster, pandemic or anything like that when they come up? It reminds you that there are threats out there and I’m just kind of curious to see like what happens next. Not terrified, I wouldn’t use that word, I’m just more interested.

Brent Pasqua: Yeah. And I think it is sort of an opportunity for people who have avoided the market for so long because it’s been high … some of the things that we’ve been talking about in the past was dollar cost averaging or putting a little bit of money in the market slowly, you’ve got a little bit of this sell off, things are on sale, it does provide a little bit of opportunity. I think everyone needs to proceed with caution. I mean, whether it has to do with the virus or the market, I mean we are in some of these territories where we’re not familiar with and we’re not sure what’s going to happen over the next couple of months. But hopefully, it’s just sort of this blip on the market timing and we can move past it. I am curious to see what happens. I think all of us are, but hopefully we move on from this very quickly.

Brent Pasqua: And I think for a lot of our clients who are sitting and may be concerned or they just retired or they’re getting ready to retire, I mean, these things happen. Historically, we’ve seen a lot of things happen in the market and at the end of the day, we just kind of stay status quo and we have a plan in place and when you have solid plans, you don’t panic or freak out over these types of things.

Matthew Theal: Well said. Can I give one pro tip before we close the show? We should all just stop shaking hands in this country and the virus would not spread. If we did that, we put a little mask on two weeks, this virus would be knocked right out, because everyone likes to shake hands here.

Brent Pasqua: So when you see a client or you’re meeting somebody new, what are you going to do? You’re going to like dab him on the shoulder or something?

Matthew Theal: I think today I shook my client’s last hand until this virus is taken care of.

Joshua Winterswyk: Just wear gloves.

Matthew Theal: What’s the upside?

Brent Pasqua: Yeah. I mean, I think people are going to be cautious.

Joshua Winterswyk: We’re still human. There’s only, how many cases right now in the US? 35.

Matthew Theal: I see you every day and we don’t shake hands.

Joshua Winterswyk: So when you shake hands you’re probably going to shake hands more with people with the actual flu than you are with the coronavirus.

Brent Pasqua: That is true.

Joshua Winterswyk: And you’ve been doing that over the last year.

Matthew Theal: That’s a good point. But anyways, I’m a big no handshake guy going forward.

Joshua Winterswyk: Brent, did you answer the, are you terrified question?

Brent Pasqua: Yeah, I did answer. I just think we need to be cautious right now.

Joshua Winterswyk: So are you not terrified?

Brent Pasqua: With 35 cases in the US right now, I’m not terrified.

Joshua Winterswyk: Okay.

Brent Pasqua: I think we need to be cautious. I think there are some things that can be interrupted in our supply chain. I think if somebody is dependent on prescriptions or certain medicines that they should probably stock up on those because we don’t know what’s going to happen. Like there could be that mad rush to the store.

Joshua Winterswyk: So maybe like that disaster planning.

Brent Pasqua: Yep. I don’t think it’s a bad idea to have some of that earthquake kit style stuff, and if there is a time where we can be stuck in the house for a couple of weeks while they get this thing under control, then you just need to be prepared for it. But I don’t think it’s a time to be extremely panicked and terrified. I think the market hopefully will stabilize soon, but I mean, we’ll see what happens.

Brent Pasqua: So thank you for joining us on the Retirement Plan Playbook. To learn more, please go to retirementplanplaybook.com and you can also access the show notes. We’ll see you soon.

Joshua Winterswyk: Thank you.

Matthew Theal: Thank you, and remember, don’t shake hands.

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