The Market Correction Continues – What You Should (and Shouldn’t) be Doing
As if the last two weeks haven’t been ugly enough for the capital markets, Monday, March 9, was another one for the record books with major indices seeing their biggest one-day losses since the financial crisis. Trading was actually halted for a period of time in the morning as the U.S. markets opened to a sharp decline.
The Domani Wealth team understands how times like this market correction can be unnerving to investors. We continue to remain focused on our clients and their financial wellbeing. We have been answering client questions to calm any fears about the market correction and wanted to share some of our thoughts with you.
What is going on in the capital markets?
In the last 2 ½ weeks, major capital markets have fallen into correction territory, which is typically defined as a decline of 10 percent or more in value. From their recent highs, the S&P 500 Index and Dow Jones Industrial Average have fallen by about 19 percent each. The broad international markets have also fallen by 17 percent from their recent high.
At the same time, bond yields are at all-time lows with virtually the entire yield curve yielding less than 1 percent. This means investors are paid less than 1 percent for Treasury purchases maturing anywhere between 1 month and 30 years. This is basically unheard of over the last 60+ years. The average 10-year Treasury yield dating back from 1962 to current times is 6.1 percent. Compare that to today’s 0.59 percent yield and you can see the magnitude of the fall.
What is causing this extreme market movement?
No doubt that concerns over the global spread of the newest form of coronavirus and the potential economic effects rattled the markets over the last two weeks, leading up to the extreme market decline we saw on March 9. Monday’s sharp decline was not only due to concerns over COVID-19, but also a drastic fall in oil caused by Saudi Arabia launching a price war amidst tensions with Russia.
As the news continues to remind us that the virus is spreading around the globe and has now continued to increase in confirmed cases here in the U.S., the economic impact is becoming apparent. Consumers are canceling travel plans, schools are closing, and people in areas affected are staying home. These items are negatively affecting the travel and hospitality industries, as well as manufacturing. The financial sector is being negatively impacted as rates fall and their revenue from loan interest takes a hit. The energy sector is also declining given the fall in oil prices mentioned previously.
We believe there are two forces at play right now: Economics and Fear. The economics of the situation can be somewhat quantified. However, the fear cannot. With the availability of information being so immediate in today’s world of the Internet and social media, fear can spread quickly, causing very swift market movements and market corrections. As investors sell equities and purchase “safe haven” assets (such as U.S. Treasuries), equity prices are driven down and bond prices are driven up (causing bond yields to fall), and this has happened at a very swift pace over the last few weeks.
Will the coronavirus put a halt to the global economic recovery?
No, probably not. While the coronavirus presents a hurdle to global economic growth, it is not a total derailment. The good news is we entered 2020 on fairly solid economic footing, with the U.S. seeing low unemployment and a strong, confident consumer. In addition, the international markets appeared to be reaching an inflection point and were poised for future economic growth.
Another key point is the monetary and fiscal stimulus entering the system in an attempt to provide some stability. The Federal Reserve cut interest rates by 0.50 percent last week. Although this didn’t provide immediate relief, the Fed also made some changes to overnight lending rates for banks to assist the financial sector. Also, as we write this piece, we await news from the White House on an economic stimulus package later this evening, Tuesday, March 10. We have even learned of some CEOs giving up a portion of their salary to help employees who may be more directly affected by the economic pullback. All in all, we are glad to see both monetary and fiscal policies being established quickly to support the economy during this market correction.
What is Domani Wealth doing in this environment to help our valued clients?
- First and foremost, we are speaking with our clients, answering their questions, and calming any anxieties about the market correction. It is our job as an advisor to provide our clients with perspective and help them to remain disciplined on the path to their financial goals.
- Given the recent pullback, equities appear to be “on sale” compared to historical valuations. We are looking at residual cash balances to determine if cash can be invested in a diversified manner consistent with our clients’ long-term goals.
- We are looking for tax-loss harvesting opportunities for our clients to help minimize their tax liability for 2020. This means we are looking for opportunities to shift out of some positions with capital losses and, on the same day, purchase positions as replacements that are fairly similar to the positions sold. This allows our clients to remain in the market to take advantage of a potential market turnaround. However, this also allows us to book some losses for tax purposes that can be used to offset future capital gains from a tax perspective.
- With borrowing rates at such low levels, we are working with some clients on refinancing outstanding debt. This can be a key factor in maintaining a strong balance sheet for our clients.
What should you be doing in turbulent times like these?
- Don’t let emotions rule the day. While it can be unnerving to see the markets swinging by such large amounts, it is important to remain focused on the big picture. Do not make irrational decisions in times of market stress. The key to long-term investing is to maintain a diversified portfolio with an asset allocation that is in alignment with your financial goals.
- Review your cash needs. Do you have large expenditures in the future that we need to consider when managing your portfolio? Has your cash flow situation changed? It is important to keep us informed of any cash needs you may have in the future. When the markets are volatile and you must sell investments to raise cash, you may be forced to sell at inopportune times. If your cash needs are known, it is a good idea to plan for these ahead of time.
- Have your financial goals or risk level changed? Do you have any new goals? Has your time horizon changed? Please reach out to us with any changes to your financial situation.
It is important to remember that periods of volatility are to be expected in the capital markets. We have been through times like this market correction before and will most likely see more volatility in the future. However, as always, we are monitoring the economic and market correction situation closely and will keep you informed of our thoughts.
Our focus remains on our clients and doing what is in your best interest given your specific financial situation. It is important to focus on the big picture, and not get swayed by emotion or irrational decisions. We are here for you and it is our pleasure to speak with you about your portfolio or financial plan. Please do not hesitate to reach out to us if you have any questions about the market environment or your financial situation.
Sources and Footnotes:
All figures quoted as of March 9, 2020. Source for index data: Bloomberg. Broad international market index is MSCI ACWI ex USA Net Total Return USD Index. S&P 500 Index high point occurred on 2/20/2020. Dow Jones Industrial Average Index high point occurred on 2/12/2020. MSCI ACWI ex USA Net Total Return USD Index high point occurred on 1/17/2020. Other Sources: US Department of the Treasury, macrotrends.net, wsj.com
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.