Update on Market Volatility
In light of recent market volatility, we wanted to offer some perspective on the market sell-off during the last several weeks due to the COVID-19 coronavirus pandemic.
First, we want to assure our clients we are continuing to closely monitor this everchanging situation, and our portfolios are structured to withstand this type of short-term volatility.
We understand significant market swings can be unnerving for investors. It is important to remember drops in the market are not unprecedented, and we will likely see more volatility in the coming days and weeks as the scope of the pandemic becomes clearer.
Market volatility is normal and can be expected from time to time. Keeping your long-term investment strategy in focus is key to riding out such periods.
With that said, let’s look at what we do know about the current economic climate and what impact it may have on the financial markets in the short-term.
- The ongoing news about the worldwide spread of the coronavirus has inserted a significant amount of uncertainty into the markets. As of April 1, there were more than 930,000 cases globally and more than 186,000 cases in the United States, which has seen cases in all 50 states. The response to the pandemic in the United States has been extraordinary, as most Americans are now under stay-at-home orders, and much of the country’s economic and social activity has ground to a halt. Adding to the uncertainty is the fact that there is no clear timetable as to when things may return to “normal.” The long-term impact of the coronavirus on world economies and supply chains has yet to be fully determined, but there is the strong possibility of lower earnings through at least the second quarter of this year. There are some estimates forecasting at least a 30 percent decline in Gross Domestic Product (GDP) in the second quarter of 2020.
- In another unprecedented move, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27. The $2 trillion coronavirus aid package is intended to provide economic relief to the United States economy and help individuals and businesses weather the freeze of economic activity. It is the largest economic stimulus package in American history. The act was “Phase 3” in the government’s response to the coronavirus. The first phase, signed into law on March 6, included an $8.3 billion bill for coronavirus vaccine research and development, and the second phase, signed into law on March 18, included $104 billion mainly focused on sick leave and unemployment benefits.
- Millions of Americans have lost their jobs during the pandemic, and some estimates report the unemployment rate could ultimately top 32 percent in the second quarter of 2020. That would equate to more than 52 million unemployed persons, a staggering number considering there were approximately 5.76 million unemployed people in February when the unemployment rate was around 3.5 percent.
- After reaching record highs in early and mid-February, the Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500 Index all saw significant declines toward the end of the month. By late February markets worldwide entered into correction territory. Global markets became extremely volatile in early March due to the rising threat of the coronavirus pandemic and an oil price war involving Russia and Saudi Arabia. On more than one occasion in early March, trading was halted briefly after the S&P 500 index fell sharply, triggering mandatory “circuit breakers” in place to prevent large declines during market volatility. Through March, many global markets had seen a downturn of 25 to 30 percent.
- The Federal Reserve took a series of actions in March in response to the growing economic threat of the coronavirus. The Fed cut interest rates by 50 basis points (half a percentage point) on March 3 during an emergency meeting. Then, on March 15 in another emergency meeting, the Fed cut rates to effectively zero and announced plans to buy $700 billion in government securities.
A combination of the above and other factors has led to and has accelerated some panic selling in recent weeks, and while markets continue to be volatile overall, there have been some signs of relative stability on the horizon. All except our most aggressive portfolios have built-in downside protection in the form of fixed income, and our firm is well-positioned to see our clients through these uncertain times.
If you have any concerns or questions, please don’t hesitate to contact your financial planner directly. We are here to help.