Following a dramatic downturn in the first quarter due to fears over the novel coronavirus, global stock markets rallied in April, spurred on by continued support for small business by the Federal Government, via the CARES ACT, and a slashing of federal-funds rate to zero by the Federal Reserve in the second half of March.
Below are returns for the month of April for major stock and bond indexes. All return data provided by Morningstar.
Markets have a lot to digest. First quarter GDP was down 4.8%, after adjusting for inflation, and over 30 million unemployment claims were filed in the past five weeks.
While it’s nice to see April flowers, given the troubling employment numbers and the lack of spending by US consumers, many economists are predicting May showers.
Global markets have been roiled since Monday over news that the Coronavirus (dubbed COVID-19) has spread beyond China into Italy, South Korea, Iran, and most recently one case in Brazil. While there have been very few cases in the United States, as more and more countries experience the spread of the virus, successful containment becomes harder and harder. Understandably, the markets reacted to the news by declines in excess of 3% for two consecutive days. As of this email, US markets are down slightly, but as the virus spreads the potential for further market correction becomes highly probable due to the projected slowdown in global growth resulting from the virus. The question now being, “what should an investor do?”
First, let’s remember that this isn’t the first case of an epidemic impacting our global economy. A short history would include:
One can see that while there is concern of a global economic slowdown should the Coronavirus continue to spread, this is not the first and won’t be the last global epidemic, and none of the previous outbreaks over the past 18 years resulted in a global recession.
Second, keep in mind that all client portfolios are designed to accommodate bear markets and corrections. Clients in withdrawal phase have ample bond positions (which have rallied as money pours into less volatile investments) to see them through years of average annual withdrawals. Those in the accumulation phase will not be needing the funds in the short-term, and a correction provides them an opportunity to continue to invest, but at a lower cost. In the meantime, Dolan Capital is a big believer in making lemonade out of lemons, so as we move forward we will take advantage of all financial planning opportunities a bear market presents including lower mortgage rates, tax loss harvesting opportunities, and the ability to invest new cash at a lower basis.
On a brighter note, the CDC noted that while the virus is quite transmissible, it is not as severe as it first appeared, impacting the elderly and those with chronic health conditions the worst. It is not as impactful on children. Hopefully the warmer temps of Spring will create a shortened life for COVID-19.
Whiplash is a neck injury due to forceful, rapid back-and-forth movement of the neck, like the cracking of a whip. Sound like our investment markets recently? Like whiplash, volatile market fluctuations may cause pain, stiffness, and headaches, especially if you enjoy following every day’s market fluctuations. Interestingly enough, the remedy for both is also similar – patience and rest while the injury heals. (Note: this is not intended to be used as medical advice for whiplash!) This can be hard to practice as we watch the markets hurl themselves in completely opposite directions almost daily. In the past month alone we’ve seen the S&P 500 decline nearly 3% from Aug 2 – 5th, only to be followed by a rebound of 3.3% from Aug 5th to the 8th*. When the average annual return of the S&P 500 from 1960 – 2018 is 9.8%**, these moves represent nearly a third of the total annual return. Little wonder they shake the markets.
At Dolan Capital, we prefer to use data analysis to guide our investment advice. From this data, we know that trying to time the ups and downs of the market is futile – albeit tempting. To help you avoid this temptation we have attached a graph showing the impact on performance if you remain invested vs. missing a few days of strong market return (see below). Of course, we know logically the reverse is true – if you can reliably predict which days are going to be one of those 3% loss days. Or maybe it’s one of those days that drops precipitously in the morning only to rebound by market close.
To make this even more difficult, statistically volatile positive and negative days occur close together. The 4 days between February 6, 2018 and Feb 9, 2018 recorded three of the four largest intraday point swings for the S&P 500. On Feb 6 and 9th the markets closed up over the intraday lows by 3.9% and 3.4%, respectively, while on Feb 8th the S&P 500 closed down from the intraday high 3.9%. All three days saw intraday swings of over 4%*. Does anyone even recall this? Probably very few.
The markets will survive trade disputes, political rhetoric, and inverted yield curves. Market downturns are a normal part of investing and your portfolio will experience many of them. Our advice, given the current market environment: patience and rest.
*Intraday data for this article provided by Yahoo Finance
**Return data provided by Morningstar