As another week goes by, another volatile period goes along with it in the financial markets. Monday the S&P 500 Index dropped to 2,386.13 which represented a decline of 11.98% in one trading session. As widespread testing for COVID-19 becomes available, the number of cases in the US is expected to increase. The market being forward-looking, will likely bottom before new cases peak. We believe this has yet to happen. If a global pandemic wasn’t enough, the recent dive in oil prices has sent the equity markets into bear market territory, which is defined by a decline of 20% or greater from all-time highs. This is the first ‘official’ bear market since the 2008/2009 Great Recession after more than a decade of strong market returns.
Historically in times of correction, diversified investors had been able to reduce the volatility in their portfolio by investing in stocks and bonds. However, both stocks and bonds have felt the heat as bond yields have reached historic lows with the Fed’s 10 year treasury yield closing at 0.728% close of trading Monday (March 16). Let’s take a second to think about that, you will be paid less than ¾ of a percent, per annum, to loan your money for 10 years. That will not help you preserve your purchasing power over any extended investment period. This historically low yield is due in large part as result of the perceived recent flight to safety over the past three and a half weeks pushing bond yields to unprecedented lows coupled with the Fed’s emergency declaration Sunday evening (March 15) that they will be reducing short-term lending rates a full percentage point, down to 0%. In addition to the rate cut, the Fed has also provided they will be buying treasuries to inject cash into the markets in a move towards quantitative easing. The plus side of this – over time low interest rates historically have provided support to equities and the increased cash could help the economy.
Even amidst a correction of this speed one thing remains certain, investors who can stay the course and look past current market volatility historically have been rewarded long term, although past performance does not guarantee future results. As you know, the equity markets cannot be accurately forecast nor consistently timed. The only way to be sure to capture the full and permanent return of equities is to remain fully invested during the temporary declines. President Trump indicated Monday (March 16), virus response could last until August. We expect markets to continue to be volatile over this time.
Considering the economic impact, we are undoubtedly expecting to see a slowdown in the U.S. economy. The travel industry is expected to stop for the near future and the energy industry is coping with decreased demand and increased supply. Consumer spending is holding in there, but a combination of social distancing and temporary layoffs due to COVID-19 could put consumer spending at risk short term. Due to all this, the odds of a recession have increased, and we could see corporate earnings turn negative in the first quarter, which would continue to dampen market outlook.
Here is the positive side domestically: The Federal Government has expressed its intent to support individuals and businesses during this period in hopes to help reduce the economic impact of COVID-19; Economic data was strong coming into this; Unemployment claims are the lowest they’ve been in decades; Housing, which encompasses most consumers’ wealth is robust and will benefit from lower interest rates; And the decline in oil prices should further support the consumer. Apart from this pandemic, which we remind you is temporary, the economy does not have the additional negative contributors that have been present during previous recessions.
The good news globally, in China the spread of the virus appears to have peaked. In Hubei, where the outbreak originated, Chinese authorities reported eight new cases Thursday of last week, the first below 10 since the outbreak began. South Korea has been aggressive in testing, and after four weeks the nation appears to be on the other side of the outbreak.
Health experts have stated the duration of the outbreak is expected to last four to eight weeks. If the government can find a way to bridge the gap through fiscal stimulus, along with monetary policy support from the Fed, we should be able to weather this with earnings and growth recovering in the second half of the year. This is a much different problem than in 2008/2009 when the housing market was underwater nationwide.
For some historical context, markets have experienced a decline of -20% or more, about once every six years (source Capital Group, Standard & Poor’s) and the average length of this decline is 401 days. The last occurrence of a 20% correction, for all intents and purposes, was as recent as December of 2018. The S&P 500 index closed at the then all-time high of 2,930.75 on September 20. It then hit its trough at 2,351.10 on Christmas Eve 2018 technically dropping 19.78% from its all-time high. Although it didn’t ‘officially’ reach a correction, the point remains that these things happen, and more frequently than you’d like to think. From December of 2018 to February of 2020, the S&P 500 Index climbed to its all-time closing high of 3,386.15. A 44% increase. Recent history shows how quickly markets can move. Just like on Christmas Eve of 2018, todays equity prices appear to be trading at a good value.
In periods of declining markets, emotions run high, which is natural and understandable. But it is exactly in times like this that a long-term perspective is most important. Historically speaking markets have rebounded from every previous correction experienced. Now more than ever, we will continue to be in close communication with you to reaffirm your long-term objectives. As we learned during the Great Recession and, times before that, the worst thing to do in times of crisis and heightened market volatility is to panic and cash out. We want to continue to remind you to stay focused on the long-term time-horizon implemented when you established your investment allocation. We’d also like to take this time to ask you to make sure your near-term cash needs are covered and if you need money from your investments over the next three to six months, please bring this to our attention as soon as possible. This will be a process, but we will get through it together.
Continued Success,
Jon Launder, CFP®
LFS-2999669-031720
