The Great Pause: The Bear Market And Sustainable Investing

My first year as a financial advisor happened to coincide with the great recession in 2008, which marked the worst market downturn in 50 years. Great timing, right?

I had clients who had entrusted me, a 26-year-old, with their life savings. The market was spinning out of control, and the well-diversified portfolios I had recommended were crashing as everything went down in tandem. It was an ugly time to be a financial advisor, and I was baptized by fire. Trust me, there were plenty of painful conversations.

Stay the course. Keep a long-term perspective. Don’t panic. At the time, I repeated these mantras, but they didn’t mean much to me. The truth was that I, along with everyone else, had no idea how the financial crisis would play out. I was glued to CNBC, watching the market implode in real time.

Investing in 2020

Today, I have a much different perspective, having already invested and been through the worst. I didn’t know it at the time, but this experience would prove invaluable.

This past March, which now seems like years ago, marked the end of the record eleven-year bull market run that started in 2009.

A lot can happen in eleven years! My personal highlights include living in three cities, working at three companies, getting married, having kids, and launching a business.

The most recent bull market ended in a spectacular fashion, as we saw the S&P 500 crater over 36% from the record close set in February. The global economy came to a grinding halt as governments around the world locked down due to COVID-19.

Emails and phone calls started to roll in from concerned clients. My calendar started to fill up quickly with appointments. We were in a full-blown pandemic, and the panic was just starting.

Of course, as retail investors started selling their stocks, the government was in the process of putting together an unprecedented two-trillion-dollar stimulus package.

History Doesn’t Repeat Itself But It Often Rhymes

The same thing played out in ‘08/09. Points of mass pain and panic selling tend to mark the bottom of corrections or bear markets. Vanguard has researched this and found that individuals are especially bad at timing the market and vastly underperform because they let their emotions drive their decision-making.

The massive $2 trillion stimulus package (that’s more than two times larger than the ‘09 stimulus!) that was released marked the beginning of the end of a record short bear market, which only lasted a month.

April was one of the best months ever recorded, with the market rallying 27%. Similarly, the bear market in ‘08/09 also ended a few months after President Obama passed the $900 billion stimulus package.

The Stock Market is Not The Economy

Why in the world is the market doing so well while we are in a recession with record unemployment?

It’s important to remember that the market is forward-looking, and the clever analysts and institutional investors on Wall Street try to price in what will happen to corporate earnings and the economy three to six months in the future.

This is part of why it seems like we have such a disconnect between the market and the economy, especially when we see a massive shock to the system.

We Are Not Out of The Woods

But don’t pop the champagne just yet! We are walking on thin ice right now. The stimulus package and intervention from the Federal Reserve have helped for the timing being, but it’s difficult to say where we will be in six months or a year.

We could always see another downturn brought on by a spike in COVID-19 cases or a major delay in developing a vaccine. It may also take longer than expected for things to get back to normal. This ordeal has been terrifying, and a lot of people aren’t going to go back to their old ways.

Did Sustainable Investing Add Value? Yes!

So how did the Impact Fiduciary portfolios hold up during the downturn? Fortunately, sustainable Investing added significant value.

Sometimes what you don’t own is more important than what you do own. Impact Fiduciary–managed portfolios do not own any fossil fuel energy companies and instead invest in alternative energy companies such as solar that are trying to solve the climate crisis.

This sets us apart from almost every mutual fund and index fund available to retail investors, including most so-called “socially responsible funds.”

Fossil Fuel Energy Gets Pummeled

Every bear market has been led downward by one or two sectors. In 2000, we had the dot.com bust led by the tech sector. In 2008, we saw the financial services sector blow up as the real estate and subprime mortgage market collapsed.

The most recent downturn was led by the fossil fuel energy sector as the Saudis and Russians engaged in a price war while the global demand for oil completely dried up. Investing in oil alongside these countries is the equivalent of going into business with the mob: It’s not going to end well.

Take a look at the chart below showing the year-to-date fossil fuel energy sector versus the S&P 500. At one point the energy sector was down over 60% in March.

Source: Fidelity Investments

Surprisingly, alternative energy companies such as solar have held their own during the downturn and are now positive for the year. Here is a snapshot of the Invesco Solar ETF (TAN), which tracks the MAC Global Solar Index, compared to the S&P 500 and Energy Sector. The fund has outperformed fossil fuels by over 30% year-to-date!

Source: Fidelity Investments

What Now?

So what should you do now as an investor? Here are some important things to consider:

Emergency Fund: Having an emergency fund is always a smart idea and even more so now, especially if you happen to work in a sector of the economy on shakier ground. You may want to consider raising enough capital to get to six to nine months of living expenses in your bank account.

Certificate of Deposits (CDs) for Cash: The Federal Reserve has slashed interest rates to zero, so now may be a good time to lock in a higher rate over the next year. Savings and money market rates will likely continue to drop. There are plenty of good option for buying CDs that have minimal or no penalties if you need to withdraw the funds. Nerd Wallet has some good options.

Rebalance: The market has been on a rollercoaster ride. Rebalancing can add value in times of volatility because it forces you to sell positions that have done well to buy areas that have gone down. Studies show that rebalancing can add up to 0.5% a year in additional performance.

Tax Loss Harvesting: The market is still down for the year, and there’s still some time to swap out losing positions for similar ones to harvest the losses. This is one additional way Impact Fiduciary adds value for clients.

I know we are living in uncertain times and this has been a difficult few months. The sketch above by fellow financial planner, Carl Richards, is the perfect advice during any time period but especially right now.

Stay healthy out there!

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.