As you’ve no doubt noticed, we’ve entered a period of increased volatility in equity markets. While the threat to human life and potential economic slowdown caused by coronavirus has taken center stage, we believe these movements are being exacerbated by the current US Presidential election cycle.
Here are four things you show know:
#1 - From an economic standpoint, stocks are trending lower to reflect downward revisions in corporate profits. At the core, stock prices are based on current and projected future cash flows. The coronavirus is causing short-term supply chain disruptions from a major manufacturing country, China, and as people hunker down to avoid public places, industries such as airlines and energy will likely see reduced demand. It’s unclear how long this period will last or how sharp the snapback will be as deferred demand is satisfied over the remainder of the year.
#2 - While some sectors will suffer now, other sectors will benefit. Consumer staples stand to benefit as shoppers stock-up on basic supplies. On Friday, a major wholesale retailer reported a 12% increase in sales during the month of February.
Health care is another area expected to do well as the sector sports attractive valuations, solid fundamentals, and based on Tuesday’s Presidential Primary, a lower probability of pharmaceutical pricing controls. “Stay at Home” stocks such as online meeting companies and online shopping retailers also stand to benefit.
#3 - Central Banks around the world have demonstrated their commitment to provide liquidity to markets during this pandemic. The Federal Reserve lowered its benchmark interest rate by .50% last week. While it’s unlikely that a reduction in interest rates will immediately open supply chains or get people flying again, these lower rates will be supportive of recovery when demand fully returns over the next several months.
In addition, oil prices are trading sharply lower due to a potential price war between the Saudis and OPEC. While this is not good for oil company profits, this will ultimately be helpful to consumers at the pump. Consumer spending makes up approximately 2/3 of the US economy.
#4 - The underlying US economy is still on solid footing, as this past Friday’s jobs report from February highlighted. The unemployment rate dropped back to 3.5% and average hourly earnings increase by 3% over the past year. This is a backward-looking indicator, however, and we will be monitoring the March report for substantive changes.
So, here are some things to keep in mind as you put coronavirus concerns and market volatility in perspective:
- 10% plus corrections happen just about every single year in the US market. The average intra-year decline since 1980 is 13.8%1. The cause is different each time and right now it’s coronavirus and the US Presidential election.
- This too shall pass. The loss of even one life is tragic, however data compiled by John Hopkins University and presented to Congress on Friday shows global mortality rates of 3.3%. "We find severe cases first because they're the most obvious and they're [the people] in the hospital, so that is going to skew case mortality rates upward," (Tom) Inglesby said. "The more we diagnose mild cases, the more that will drive down the overall case mortality rate."2
It is clear that many more will be affected by the virus but proportionately few will die. The world and markets will go on.
- It’s impossible to predict the bottom of this latest correction or the magnitude or timing of the subsequent recovery. You have a diversified portfolio for a reason; for times just like this. We’ve done the heavy lifting upfront by creating a financial plan and disciplined investment strategy, so there’s no reason to change that plan now.
- Diversification is working. Below is the S&P 500 performance year-to-date (through Friday, March 6th) and the performance of the iShares Growth Allocation ETF, AOR, which serves as a good proxy for a globally diversified 60% stock/40% bond portfolio. Bonds are zigging while stocks are zagging, just as we had planned for.
- Across all accounts, we have already identified and executed where rebalancing opportunities presented themselves. We’re buying stocks where underweight in the portfolio on your behalf and selling bonds where overweight. We will rebalance again when/if the opportunity arises.
- Any cash you will need in the next 1-3 years should not be in the stock market. That’s what cash is for and is part of your plan. For those in retirement, we have been diligently rebuilding your cash bucket throughout the years exactly for moments like this.
- Interest rates on the 10-year bond have reached record lows as strong demand for safe-haven bonds has increased. Mortgage rates have followed suit and according to Nerd Wallet, “On Friday, March 6th, 2020, the average rate on a 30-year fixed-rate mortgage fell…to 3.375%, the average rate on the 15-year fixed-rate mortgage dropped…to 2.859%.”
You may want to use this opportunity to refinance mortgage debt to take advantage of these record low rates.
- For those sitting on large cash positions with a 10+ year time horizon, this is the moment you’ve been waiting for! Begin deploying this cash into your long-term portfolio and don’t worry if things get worse for a while. It takes guts to buy into a declining market, but this is how you achieve the returns necessary to support a lifetime of financial security.
- We are here for you. We are invested alongside you. We’ve been through this more times than we can count and we’ll go through this again together just about every year forward.
These periods are uncomfortable for any investor, regardless of how many times you’ve experienced it in the past. Acknowledge the discomfort and trust that things will get better again as they have every single time in the past.
We understand and appreciate all of your concerns and would love to discuss them with you.
Please reach out if we can be of any assistance. You can find a link to our calendar here.
Brian
Further reading/Citations:
1. JP Morgan, Guide to the Markets, Q1 2020, page 13
2. https://hub.jhu.edu/2020/03/06/covid-19-coronavirus-expert-testimony-to-congress/
The Standard & Poor’s 500® (S&P 500) is an unmanaged group of securities and considered to be representative of the U.S. stock market in general. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.