This past week has given investors everywhere whip-lash, and we could see it get worse before it gets better. It can be hard to remain optimistic when the media seems to bounce between great news and potential recovery, then back to the end of the world. So, we wanted to provide some perspective for you. In today’s update we are going to go over what has happened in the markets, and why investors have reacted the way they have. We will also talk about what is potentially next for the global economy and why there is still reason to be optimistic.
So, what happened last week? Markets became volatile due to the uncertainty that the coronavirus has caused for the global economy. In response, Central Banks have promised to help prop up the global economy through monetary stimulus. The first bank to act was the U.S. Federal Reserve, when they made an emergency rate cut of 0.50% this past Tuesday. Investors already believed that the Fed would be cutting rates during their March 18th meeting. The unexpected “emergency” rate cut made investors more nervous about the impact of the coronavirus on the global economy, which caused another day of steep declines. This rate cut is not meant to be a short-term solution, it is meant to help businesses weather this slow down and continue to pay their employees over the long haul.
This week is off to a challenging start as well, this time because of oil. With the continued challenges from the coronavirus, global demand for energy has begun to drop. This recent development led to an emergency meeting of OPEC on March 5th. During this meeting negotiations between Saudi Arabia and Russia collapsed. Russia has refused to reduce production despite the drop in demand globally, which led Saudi Arabia to promise to increase their own production to further drop oil prices, creating a price war. The uncertainty from this new development has compounded fears in the markets. This will likely create opportunities for long term investors. For now, we’re seeing lower prices at the gas pump, immediately benefiting consumers, and typically the overall economy.
You might be wondering; how does the global economy recover from this? Thankfully, there are quite a few things that central banks and governments can do to support the economy through this type of slow down. For example--
The economy will likely need policy responses and we have already begun to see that here in the United States with the recent rate cut. We are also seeing stimulus from the European Central Bank. The Italian Prime Minister, Giuseppe Conte, has promised €7.5 billion in government spending to help that economy through a mandatory quarantine of 16 million of its citizens.
It is still too early to tell if this will become a recession (A recession is defined as two consecutive quarters of negative economic growth, or GDP), but one thing that sets this apart from the Financial Crisis in 2008 is that the U.S. economy was very strong leading up to this decline. The markets have always preceded a recession both on the way down and back on the way up, meaning the market will drop before a recession starts, and recover before the economy does. We do not know when we will experience the bottom of this current market decline, but we cannot afford to be on the sidelines when we finally start to see a recovery. A study done by Morningstar and Lord Abbett looks at the return on an investment of the S&P 500 going back to January 1st, 1989. Over that 30-year period, if an investor missed only the ten best days in the market, they would have 50% less than an investor that stayed invested the entire time. Missing only TEN DAYS, out of 30 YEARS can change the trajectory of an investor’s future. These best days have historically been the swift rebounds the market experiences after it hits the bottom. This is the reason we avoid market timing even though it means that we stay invested in difficult and uncomfortable times. We do not let short-term uncertainty affect our long-term plans.
We are always hoping for the best but planning for the worst here at BF&A. Several years ago, we implemented a disaster recovery plan for our office. In the event we were to be subject to quarantine, or were experiencing a business disruption for any reason, we are prepared to work remotely and have the ability to have ongoing client communication via phone, email, and the client portal. The takeaway, if you reach out to us, no matter the circumstances, we will respond.