This week has been historic for the financial markets, and not in a good way. Prior to this week, the major stock indexes suffered a correction of greater than 10% due to concerns about the spread of the coronavirus. Then on Monday, stocks cratered right out of the gates, triggering a 15 minute “circuit breaker” pause in trading as the sell-off hit 7%. This meltdown was largely the result of Russia not agreeing with Saudi Arabia and the rest of OPEC to cut oil production to compensate for the reduced energy demand as a result of reduced travel and manufacturing due to the virus. The entire yield curve (meaning all maturities) traded below a yield of 1% that day for the first time in history. Huge price swings followed Tuesday and Wednesday, with another sickening meltdown today which again triggered a 15 minute pause in trading right after the open. Investor sentiment was further soured as travel restrictions were implemented and large sporting events and the like were canceled in an attempt to contain the spread of the virus. In record time, the major U.S. large cap stock indexes have plunged from record highs to bear market territory, meaning a drop in excess of 20% from their prior highs. The swiftness of the drop has been reminiscent of the 1997 Asian Financial Crisis and Black Monday in October 1987. We are witnessing a crisis of confidence.
I am still inclined to believe that the coronavirus will result in a two quarter hit to global economic growth and corporate profits, though it is conceivable that the ripple effects could prolong this. A recession is growing more likely which is simply two quarters of negative economic growth. According to a study in December 2017, the CDC estimates that between 291,000 and 646,000 people die worldwide from seasonal influenza-related respiratory illnesses each year. By comparison, as of this morning a Reuters tally says that 4,700 have died so far from the coronavirus. I believe it is encouraging that China and South Korea, two of the first countries hit by the virus, seem to have contained its spread. And, China’s stock indexes are weathering this storm better than our own. I believe this bear market will prove to be a cyclic bear market (shorter duration) opposed to a secular bear market (longer duration) due to our underlying economy being strong. This is not like 2008 when our country had a huge pile-up of bad debt with financial institutions failing and requiring years to resolve.
It is important for investors to remember that selling stocks after major sell-offs can result in a permanent, unrecoverable loss of capital. During any given month or quarter, just about anything is possible with respect to the return on even a fairly conservatively balanced portfolio. But, as holding periods get longer, studies show that trailing returns become less volatile and the likelihood of a negative return goes down. The best strategy during times like these is to rebalance portfolios. During periods of extreme volatility, the more conservative positions in a portfolio – typically bonds – become overweight, and the more growth oriented assets – typically stocks – become underweight in a portfolio. By rebalancing, an investor is essentially selling high the securities that have appreciated in the portfolio and buying low the securities that have depreciated.
As always, I am happy to discuss any questions or concerns you have.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President