Dear Friends and Colleagues,
We wanted to touch base to address the recent volatility in the markets which has primarily been driven by fears associated with the coronavirus.
Coronavirus Market Impact:
Reports of the spread of the coronavirus have dominated media headlines, scaring investors and roiling markets. The sell-off accelerated after the US Centers for Disease Control and Prevention warned that it was likely the outbreak would evolve into a pandemic that would cause disruptions to daily life in the US. As of this writing, the S&P 500 has fallen close to 12 percent from recent all-time highs achieved on February 14th. In years past, market professionals and commentators used to call a 10% correction “healthy”. Since it has been a long time since we have experienced this type of volatility, this particular correction certainly does not feel healthy.
“Markets hate uncertainty” and the coronavirus is providing plenty of it. The situation is fluid and governments around the world are responding with significant resources. Among the questions we ask are how well are containment efforts working and how fast will this virus spread? What is the extent of the impact of supply chain disruptions and delays in just in time inventory systems on US and Global manufacturing? How will consumer confidence and spending decisions be impacted if fears do not subside in the near term?
While the coronavirus is the main culprit behind the recent selloff, there are other factors that have likely also contributed to market volatility: the upcoming 2020 presidential election, elevated equity valuations and the inverted yield curve which often is a predictor of a slowing economy.
It is too soon to know the full impact of this outbreak. However, history has shown that responding to headline-driven events, in a fearful knee-jerk fashion, is often not in an investor’s best interests. Rather, it is at times like these that maintaining your focus on a disciplined investment approach is often the prudent course of action.
While single-day declines greater than three percent are fairly uncommon, it is wise to consider that market pullbacks are a normal part of longer-term market cycles. In fact, over the past 40 years, the average intra-year decline for the S&P 500 Index has been roughly 14%. Despite those 14% average intra-year declines, historically the market has posted a positive return a remarkable 75% of the time. The broad message here is that markets can and will be volatile and the road to higher returns through equity investing can be quite bumpy at times.
A good gauge of investor sentiment is the CNN Fear & Greed Index which measures several market volatility metrics (https://money.cnn.com/data/fear-and-greed/). The Index is now at extreme levels. While this is not a prediction on our part, we do want to note that the recent sharp sell off has brought investor sentiment to extreme levels. In the past, as the accompanying chart illustrates, these extreme sentiment levels were an indicator that a market rebound was near.
How Should Investors Respond?
Wall Street Journal writer Morgan Housel once remarked, “All past market crashes are viewed as opportunities, but all future market crashes are viewed as risks.” Such a truism only becomes clear in hindsight. In the midst of heightened market volatility, one may be tempted to make significant tactical moves out of fear over further market declines. We would caution against making broad changes, as such reactive decisions are often ill-timed and can impair the effectiveness of a thoughtfully designed investment plan. We’d also note that the majority of our portfolios have a healthy allocation to fixed income which has been performing well and adds nice ballast to a portfolio.
We will of course continue to monitor the situation, while staying focused on our investment discipline which has served our investors so well over the past 30 years. We have made changes to de-risk client portfolios in recent days. However, we do not currently find compelling reasons that would justify overriding our asset allocation methodology despite elevated uncertainty.
We continue to believe that investors should be patient and adhere to a well-constructed, diversified investment portfolio anchored to their long-term goals and time horizon. Of course, we value your thoughts and concerns and want to assure you that our lines of communication are wide open. We encourage dialogue should you like to discuss your portfolio positioning as it relates to your goals and objectives.
Elliot B. Herman, CFP®, CPA
Chief Investment Officer