SUMMARY OF CURRENT EVENTS
With virtually all major market indexes around the world down significantly over the last couple of weeks, and with market volatility and anxiety being amplified by fast-changing events, we wanted to share our thoughts regarding market conditions as we perceive them.
Obviously, the uncertainty surrounding the magnitude and effects (supply chain disruption and demand destruction) of the coronavirus (COVID-19) is the primary culprit of the downward pressure markets are experiencing. Additionally, the added supply shock caused by the Organization of Petroleum Exporting Countries (OPEC) oil price war is putting investors on edge regarding a global recession and building stress within the world’s financial markets.
In response to this, we witnessed a coordinated monetary policy response from G-10 central banks, including the U.S. Federal Reserve’s (Fed) announcement of a return to zero-bound interest rates and quantitative easing, aimed to stabilize market liquidity and confidence. The Fed also reduced bank reserve requirements to zero, which allows banks to make more loans and improves their margins as cash moves from the Fed’s near-zero rate on bank reserves to higher yielding assets.
The next area of intervention/relief concerns fiscal policy. The U.S. Executive branch, Congress and other global governments will likely follow the central banking system’s leadership by implementing looser fiscal conditions, even if temporary, designed to alleviate strain. As events progress, expect to see increasing support in the form of subsidized lending programs, tax relief, job security and healthcare coverage. The coordinated global effort to provide support to individuals, businesses and financial institutions is commensurate with the rapidity and magnitude of the recent developments.
The initial reactions to the uncertainties created by coronavirus were characterized by a flight to safe-haven securities such as U.S. Treasury bonds; citing the impacts of supply chain disruptions, bond market participants sought to reduce risk, ultimately compressing the yield curve substantially. Equity markets, though, were less concerned about the emerging threat, focusing more on prospective, continued corporate earnings and economic growth.
Currently, the propagation of aggressive containment measures globally, including travel restrictions, social distancing measures, event cancelations, restaurant closures, quarantines, etc. are rapidly and adversely affecting the global economy, and in turn markets in a material way. Volatility has soared, U.S. stock exchanges have interrupted trading operations as needed, the 10-year Treasury bond yield has been well under 1%, and credit spreads have been widened appreciably.
Perhaps a dubious assertion presently, but there will inevitably be a period of accelerating recoveries in the next few weeks (admittedly after a period of increased contaminations). And given the likely progress toward treatments/vaccinations (though certain not to be complete), markets will begin to look past the current issues. Capital markets and economic growth will be newly catalyzed by central bank and government stimulus. As mentioned previously, the virus-related impact on the global markets, though considerable, will mostly be transitory; the first and second quarters of 2020 could both exhibit negative Gross Domestic Product (GDP) growth. Upon the conclusion of these events, though, there will be some long-lasting effects; supply chain management and its relationship to consumer behavior will no doubt be forever altered.
Everyone recognizes that we are experiencing something unprecedented. The issues we are facing are not those that presage a garden variety recession, such as overly restrictive monetary policy, the deflation of an asset bubble, defensive consumers or the evaporation of credit. Given the uniqueness of the situation, accurately predicting the probability and or magnitude of an economic slowdown is difficult. That written, and while accepting the prospect of a global economic contraction, we can more confidently assert that the impact on the U.S. economy should be less severe than other countries or regions, simply given its position heading into these events.
Over the coming months, as greater clarity emerges, U.S. consumer confidence will strengthen. Repressed demand should spur a rebound in activity, a recovery of asset-prices, and a regularization of flight-to-quality. Until then, it is important for investors to exercise patience and discipline; we aspire to the maintenance of portfolio liquidity while capitalizing on opportunities to add quality investments at a discounted value.
FOCUS ON YOUR PLAN
During any volatile period, whether economic, political, social, etc., it is very important to not rely on things that are out of your control but rather rely on and review the plan that has been developed with you and for you. Under unprecedented conditions, such as we find ourselves in right now, it is even more important to focus on your plan. Each client has a plan, and yes plans can change, but the best plans change based upon circumstances related to your life, not changes occurring in securities markets, real estate, or any other investments.
During times of crisis, you already know that your plan should help direct you through it. However, it is in times like this where we are tempted to question the plans we have developed. Stay the course. The reasons markets fluctuate, especially wildly, is due to a lack of clarity and certainty. It is easier to make decisions much more clearly when the number of factors influencing our decisions is fewer.
We are here to help guide you through this uncertain period. We are here to test the assumptions which have been made, and to adjust, if necessary, but preferably based upon focusing on the elements we can control and not the factors out of our control.
During times like this we find it important to reflect upon past market shocks and events to put into perspective current events. Sam Stovall, a very well-known financial expert, has some excellent perspective on past market events, from an article he wrote in October 2017 for the American Association of Individual Investors, “Stock Market Retreats and Recoveries”.
Highlights of this article include:
“In more than 85% of the declines of 5% or more, the market got back to breakeven in an average period of only four months or fewer.”
“Since World War II, there have been 56 pullbacks (declines of 5% to 9.9%), 21 corrections (-10% to -19.9%) and 12 bear markets (-20%+).” Another way of displaying the frequency of market declines is by simply dividing the number of bull market years since World War II by the count of each decline type. By this method, pullbacks have occurred every year, on average, while corrections happened every 2.8 years and the S&P 500 fell into a new bear market every 4.8 years.
“The 56 pullbacks since December 31, 1945, dragged down the market by an average of 7%, taking about one month to go from peak to trough. However, the S&P 500 then took an average of only two months to recover all that was lost during these declines. What’s more, the market took only about four months to recover fully from declines of 10.0% to 19.9%. In greater than 85% of all declines of 5% or more since World War II, the market got back to breakeven in an average of only four months or fewer! Finally, the S&P 500 took an average of only 14 months to recover from the more typical “garden-variety” bear market (declines of 20% to 39.9%).”
We are confident that markets will make appropriate adjustments. However, this may not occur for days, weeks or possibly months. The volatility in the interim may continue to be rather unsettling but this too, as with past disruptions, will pass.
For further conversation, please contact your BerganKDV Wealth Advisor.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.