The Coronavirus Caused A Bear Market. Now What for Investors?

The coronavirus caused a bear market between March – April 2020. But thankfully, we are back to bull markets in 2021 and beyond! Let's review how the bear market transpired and what's next.

The Coronavirus Caused A Bear Market

Despite AA-rated municipal bonds historically having a historical 0.1% default rate, muni bond funds like MUB, the National Muni Bond ETF, also declined by ~5.5% on March 12. Even Treasury bonds dipped a couple percentage points as there was nowhere for investors to hide, except for in cash.  

National Muni Bond ETF selling off during stock market bear market - The Coronavirus Caused A Bear Market

To me, the relatively drastic decline in municipal bonds on Thursday was a signal that fear had reached the upper limits. I can understand equities getting pummeled with earnings set to go into free fall. However, it would take the first zombie apocalypse in history for highly-rated municipalities to default.  

During the previous financial crisis, MUB declined only about 4% from August 1, 2008, to November 1, 2008, but was relatively stable throughout the 17-month recession.  

Action: Now is the time to build your your municipal bond allocation if you've been looking to build a more defensive portfolio and earn tax-free income.

Mortgage Rates Watch

The Coronavirus Caused A Bear Market and mortgage rates should generally go down. Unfortunately, mortgage rates ticked up during the S&P 500 meltdown in the first half of March given all types of bonds sold off. Just as well since the demand to refinance is running 2.5-3X higher than it was last year. Even if you timed the bottom of mortgage rates perfectly, you still might not have been able to take advantage as some banks were turning business away. 

Over the next two months, lenders should successfully work through their big backlog of refinances and mortgage rates should settle back down again. If you're looking to refinance, this is why it's worth checking the latest mortgage rates every day the bond market is open because you never know when there will be a big drop.

Thankfully, mortgage rates have come down as the Fed slashed the Fed Funds rate to 0% – 0.25%.

Action: Check the latest rates online and call up your existing bank and ask what they've got.  There will be interesting kinks in the system you can take advantage of, but only if you are regularly checking.

All-time low mortgage rates

The Good News About The Coronavirus Bear Market

Back in 2008 – 2009, we had a financial crisis due to overleverage. Too much debt destroys even the greatest of fortunes. Today, we are going through a consumption and supply chain shock.  

Deleveraging is a tremendously ugly process that takes a long time to get through.

For example, once you've lost your job and can no longer pay your mortgage, you might continue living in your home for six months mortgage-free before the bank starts knocking on your door. Then it might take another six months to work out a short-sale. If not, then you may have to go through bankruptcy proceedings that will take another six months. Once you go bankrupt, your credit is screwed for 7 years and you will not be able to borrow for that amount of time.  

Average Bear Market correction and duration

A consumption shock is much easier to turn back on. Once you decide it's safe to go outside and spend, you may spend more than your normal pre-pandemic spending to catch up. Meanwhile, once workers go back to work en masse, the supply chain should b able to restock within a couple months.   

In other words, a V-shape recovery after the worst of this crisis is over is much more likely than during previous crises.

Action: Stay the course and continue to save and invest. It's not a good idea to try and time the market by getting out and then trying to get back in when you think the bottom has been reached. If you miss some of the good days, like the 9.3% rebound we saw on Friday, March 13th, you would significantly underperform over the long run. With the average bear market declining 32%, we' aren't that far off.

The Bad News With The Coronavirus

The bad news is that things could easily get much worse before it gets better. The S&P 500 declined by ~57% during the 2008 – 2009 financial crisis.

Once 1Q2020 earnings are reported in April, companies might disappoint even the lowest of expectations, which would send share prices lower. Small business owners are going to experience a significant decline in business during the quarantine period as well.   

Below is the year-over-year change in dinners for Washington State, New York State, San Francisco, Boston, Seattle, and the United States as a whole.

Restaurant traffic is way down

Action: If you would like to help your local business survive, an effective solution is to call them up and buy a gift card or have them charge your credit card for a credit that can be used at a later date.  

If you're wondering whether Financial Samurai is getting more or less organic traffic during this time period, the unfortunate answer is less. It seems that when times are bad, there's a greater tendency to shut off because the losses are too painful.

Therefore, if you want to support Financial Samurai at no cost, you can help spread the word and have your friends and acquaintances sign up for my weekly newsletter as well.

I personally get motivated during downturns to try new things. After all, Financial Samurai was born on July 2009, at the bottom of the previous bear market. If you've been putting on starting your own website, now is finally the time to get going. You need to build your brand online and diversify your income streams.

We Will Get Through This Coronavirus Meltdown

I'm glad the U.S. government seems to finally have put partisan bickering aside and will pass legislation that will directly provide financial aid to people most negatively affected by the coronavirus. I'm impressed there is now a concerted private and public effort to get mobile testing done across America. I'm hopeful that many more people who feel unwell will self-quarantine, even without testing. 

I'm also expecting all the rich and famous people who tested positive for the coronavirus so far to keep the rest of us updated on how they are doing and eventually tell us they are back to feeling 100% normal. They were the ones who helped make the coronavirus real for the majority. I expect their recoveries to also help allay the majority's panic.

Yes, it's interesting how only the rich and famous seem to be getting the coronavirus. However, it's really because the rich and famous get more access and resources than the rest of us. This dichotomy is a wake up call and motivator for us all to at least get rich.

Have Faith In The Future!

The feeling in America now is very similar to the feeling our country experienced during the 9/11 attacks. One of unity and great patriotism to defeat a common evil. 

My finances are getting crunched. About 20% of my net worth is in equities and now my bond portfolio is on shaky ground. But I plan to keep on writing, keep on corresponding, and keep on helping out where I can.

Our #1 goal is to survive long enough until the inevitable upswing. I'm rooting for you! I'm rooting for us all! 


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