The last few days of February created confusing and turbulent times for investors. The rough stock market fluctuations created a rollercoaster-type of ride that has attracted almost every media outlet. During this time period, the S&P 500 had its worst day since 2011, as it presented a historic streak of negative moves. Let’s briefly recap some key points from the last few months. After strong equity returns in 2019, equity markets moved up another 5% by mid-February to reach all-time highs. Then, with news that the spread of the Coronavirus outside of China was growing, equity assets started to sell off.
On Monday, February 24th, we saw the S&P 500 decline over 3%. On Tuesday, February 25th the S&P 500 shed another 3%. Consecutive down days of this magnitude are rare. Then after a mild down day on Wednesday, on Thursday February 28th, markets were again shaken with a -4.4% return for the S&P 500, making this now “correction” (a downward movement of 10% or more) even more notable and potentially historic given the rapidity of the sell-off.
Investors should always be aware of market swings and movements, remembering that equity market pullbacks and corrections are a part of investing. While downward drops are typically unwelcome and unexpected, they are not unprecedented. Historically, a market correction, or a 10% decline, happens approximately once a year. A 5% pullback happens about 3 times a year, however in the last few years that has not been the case. The last major correction was in December of 2018 and 2019 was a year of limited and low volatility, so many investors were not ready for these large declines. Also, typically these pullbacks happen over a longer period than a few days. While this may not be the end of the equity markets fall, it might be helpful to put these media grabbing events into perspective.
In a dataset dating back to 1928, returns of -4% or worse for the S&P 500 have only occurred 146 times. Days where equity markets decline 4% or more are rare, and they tend to cluster in economic recessions.
When you add together the collective weak days investors experienced on Monday the 24th, Tuesday the 25th, and Thursday the 27th, you find that investors experienced a historic ride. The S&P 500 shed 10.7% over four trading sessions. While this was very uncomfortable and unpredictable, it was not unprecedented. Knowledge is helpful when analyzing your situation so let’s review some facts. There were six historical periods dating back to World War II that were worse than the four days we just experienced. They include:
- Investors have not had a four-day sell-off this bad since the financial crisis in 2008 (a total of over 17% drop in four days ending October 9th, 2008).
- Prior to that, investors had not experienced as alarming of a 4-day stretch since July 2002, when the announcement of accounting regularities at Worldcom spooked a market already grappling with the tech bubble deflation and post-9/11 uncertainty. (-11.96% in four days ending July 23, 2002).
- Continuing the list, in August of 1998, global assets were frightened by the prospect of a Russian debt default (a decline of -12.41% ending August 31, 1998).
- Prior to 1998, we experienced the historic 1987 market sell-off (a drop of -28.5% ending October 19th, 1987).
- Before 1987, there was the Kennedy Slide of 1962 (a drop of -10.97% ending May 28, 1962).
- Prior to that sell-off, you have to go back to May of 1940, which included a German blitzkrieg into France (a drop of -15.1% through May 14, 1940).
Any way you look at it, the “Coronavirus 2020 Decline” will be remembered as a historic market drawdown. (Source: SeekingAlpha 2/28/20)
Equity Markets and the Coronavirus
While the severity of the Coronavirus is still unknown, history shows that equity markets regained their strength quickly after other health crises occurred. For example, 6 months after the Avian Flu in June 2006, the S&P 500 was up 11.66% and after 12 months, was up 18.36%.
According to Seema Shah, chief strategist at Principal Global Investors, “Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons.” (Source: MarketWatch 2/24/20)
These three reasons are:
1.Social media-driven news cycle;
2.Interconnectedness of global supply chains;
3.Pricey stock market.
We cannot stress enough: don’t let the media cause you to make irrational or rash decisions. It is very hard to take all the information the media outlets push at its viewers with a grain of salt. With thousands of media outlets all thirsty for viewers, some outlets resort to scare and fear tactics to attract an audience.
KEY POINTS
- Volatility can be uncomfortable, but it is part of the investment experience.
- Beware of media magnification.
- Avoid making emotion-based decision.
- Focus on your personal goals and discuss changes with us before you make them!
In a special news conference held on February 26th with officials from the Centers for Disease Control and Prevention (CDC), President Trump shamed the media for igniting panic about the financial markets.
Volatility is a part of the investment experience. Remember, it can be difficult to make rational investment decisions when the markets are fluctuating. During these times, it is prudent to resist the temptation of watching news reports and obsessively watching your portfolio performance.
Too often emotion, not logic, can overshadow investing habits, so the first step in declaring mental independence is realizing how these influences, known as biases, affect us. Sometimes, the closer you put a short-term lens to your investments, the more likely you consider decisions that deviate from your long-term strategy. While it is wise to remain vigilant, a strong plan is to adhere to the long-term investment plan you have created.
In Addition to the Coronavirus…
10-year Treasury Yield: The 10-year Treasury yield hit an all-time record low on March 2nd , reaching down to under 1.10%. (CNBC 3/2/2020)
Interest Rates: As investors worry about the potential economic dangers of the Coronavirus, the Federal Reserve is telling financial markets they are paying attention. Fed Chairman Jerome Powell released a statement Friday, February 29th, promising to, “act as appropriate,” should the Coronavirus situation escalate. The Bank of Japan issued its own statement Monday March 2nd saying that it too will, “closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.” (Source: CNBC 3/2/20)
Fed officials believe that monetary policy changes would not make a difference in the current scenario’s primary need of slowing the spread of the disease and opening global supply chains.
“No amount of rate cuts is going to be able to do that,” said Michael Reynolds, Investment Strategy Officer at Glenmede Trust. “What they can do is hasten the recovery after all this blows away with rate cuts. That is something that’s an option for sure. But the idea that they’re going to play offense on rate cuts to soften the blow on the Coronavirus may be a bit premature.” (cnbc.com)
Political Arena: With 2020 being an election year, this makes some investors cautious of potential changes in political parties, policy changes, including tax law changes, and financial environment uncertainty. While historically, only four of the last 23 election years saw the S&P 500 with a negative, as always, remember that past results do not guarantee future performance! (Source:thebalance.com 11/7/19)
What should an investor do in a volatile market?
First, make sure you know what not to do: and that is panic. In times of market volatility, investors tend to become unnerved and anxious. Most often, this is not the best mindset to make rational decisions.
No one knows for sure how far the Coronavirus will spread and when it will be contained. We also do not know when equity prices will stop retreating, but we do understand that equity investors need to incorporate patience into strategies. Equity markets can bring more downward movements and volatility could continue. When equity markets experience unsettling fluctuations, we suggest you ask yourself three questions:
1.Have my financial timelines changed?
2.Have my financial goals changed?
3.Has my risk tolerance changed?
If you can answer “YES” to any of these questions, we highly suggest that you discuss these changes with us. As an investor, you need a plan that includes risk awareness. One of our primary responsibilities as your financial advisor is to help you create a plan with risk awareness. We know that an integral part of this is to consistently keep in touch with you and monitor your situation.
If you have concerns, some questions to ask us include:
- Can we review my financial plan?
- Can we revisit my risk tolerance?
- Are my investments diversified?
- What are my fixed income investments?
- Has the recent volatility presented any good opportunities?
Note: The views stated in this letter are not necessarily the opinion of LPL Financial and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Sources: Wall Street Journal, Seekingalpha.com, CNBC, MarketWatch, Yahoofinance.com, TheBalance.com; Contents provided by the Academy of Preferred Financial Advisors, Inc. ©