MARCH 5, 2020 MARKET UPDATE
It has been a tumultuous few weeks with regard to the stock market and news headlines. With heighted levels of volatility and uncertainty, you may be anxious about how the market developments this year will impact your portfolio and financial plan. Therefore, we wanted to take the opportunity to address the recent events and provide our perspective on how we intend to assist you with whatever may lay ahead.
What’s happened?
The spread of the coronavirus has resulted in significant economic uncertainly and market volatility. Almost all sectors of the economy, from travel and leisure to technology to manufacturing, have been impacted as a result of the massive travel restrictions and the shutting down of facilities. Some of the largest companies in the world, including Apple, Microsoft, Walt Disney, Walmart and many others have indicated that the outbreak will have at least some negative consequence on near term earnings, but it is difficult for any company to truly predict the full impact at this point. The profit warnings from companies and the economic warnings from economists and central bankers have resulted in significant volatility in the stock market. Large US stocks (measured by the S&P 500 index) fell over 12.5% from Feb. 20th to Feb. 28th. Since then, stocks have bounced around with large moves in opposite directions almost every day. In the meantime, bond yields have plunged with the US 10-year treasury rate falling below 1% for the first time in history as investors anticipate additional interest rate cuts by the Federal Reserve and rush into assets that they deem to be less risky. The Fed did in fact institute and emergency 50 bp (0.50%) rate cut on March 3rd in an effort to quell the market sell off. That cut was the first inter-meeting cut that the Fed has done since 2008. The rate cut seemed to have the opposite effect of what was intended as the market dropped by over 2.5% on the day of the announcement.
Our View
At JPS Financial, we’ve taken a cautious stance on the stock market for well over a year. Of course, we had no idea that the coronavirus would become an issue and cause the significant personal, economic and financial pain that it has. Nor do we have any idea how the outbreak will play out as government officials and healthcare workers work tirelessly in the United States and in other countries around the world to contain it. Our caution with the stock market has been based primarily on the fact that stocks have seen the longest bull market run in history. The growth in the stock market has been fueled to a significant degree, in our opinion, by easy monetary policy and ultra-low interest rates from the Fed and global central banks which incentivizes the accumulation of debt and excessive risk taking. As a result, we are comfortable with the strategic plan that we
put in place many months ago even though we had no idea that the current environment would play out like it has. We believe it is critically important for the success of an investment strategy and financial plan to make strategic decisions in normal market conditions, and not in times of extreme volatility like we’ve seen the last couple of weeks. We’d much rather be proactive and miss out on some of the gains at the top than be caught off guard and forced to scramble when the environment changes seemingly overnight.
We intend to use the same approach to determine when to systematically rebalance back into a full equity position. Investors have been conditioned in recent years to believe that no matter how steep the selloff in stocks that the market will recover in a V-shape within a few weeks or months. Historically, that is not the case. The average bear market (defined as a 20% drop or greater in stocks) lasts about 1 year, and the recovery on average has taken a little over 2 years. It does seem to us that the day to day market swings can be more violent than in the past with the proliferation of exchange traded funds, derivatives and computer driven trading. However, we believe that the deleveraging process and ultimate ramping back up of the business / credit cycle will ultimately take well over a year as it always has in the past. Governments, corporations and individuals have been levering up over the last 10 + years. It is very possible that some good economic or virus outbreak news could result in a strong bounce in stock prices. With that said, when the business cycle eventually does turn down, whatever the catalyst may be, we believe the process will take much longer than a few weeks. Therefore, we plan to stay with the strategic plan that has been set in place and not overreact too much in either direction to the daily swings in the market.
As always, we appreciate the confidence that you have placed in us as your trusted advisor and we welcome your questions or comments at any time.
Important Disclaimer
JPS Financial, LLC is registered as an investment adviser with the Securities and Exchange Commission and only transacts business in states where it is properly notice filed or excluded or exempted from such filing requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.
Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors on the date of publication and are subject to change. The information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities discussed. All investment strategies have the potential for profit or loss.
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