Volatility is the word when you consider the Covid-19 Financial Market. The coronavirus (COVID-19) scare is escalating and a logical question has moved to the forefront: Is this downswing different? Is coronavirus going to permanently bring down markets in a way those past crises could not?
The historic litany of disease outbreaks, armed conflict flashpoints, political game-changers, and other alarms all generated fear of the unknown. However, the nature of markets allows them to still create value, despite a wall of worry. This, in part, is how they do it.
Watching the Markets for Long-Term Growth
Capitalism, as we know, is an economic system where grand problems attract massive investment and innovation. This is due to the fact that the pay-off for being the first to solve these problems is financially rewarding. Subsequently, markets have demonstrated the ability to power through striking hardships when given time to play out. History shows that the market’s long-term growth comes down to just a few dozen of the best trading days. Nearly all of these high points occurred within a few weeks of the market’s worst sessions: times of elevated fear.
This time, two factors have driven the spike: ongoing fears over the spread of coronavirus and falling oil prices. As we move deeper into correction territory and approach a bear market, it is important to note that a stock market correction – any correction – has never been a question of if one would occur, but when.
What is the current state of the Covid-19 financial market?
There are several factors we need to consider.
As of March 9, 2020, the CDC has confirmed 114,223 cases of COVID-19. This is slightly fewer than 30,000 of which were outside of China. Over the coming weeks, the focus will increasingly be on global data reports, which are likely to show a measurable impact from outbreak containment efforts. The OECD currently forecasts global GDP growth in 2020 to fall by 0.5% (to 2.4%) as a result of the outbreak.
2. Sharp declines in oil prices
According to Goldman Sachs’ Commodities Research Team, the combination of the current price war sparked between OPEC and Russia (following a failed deal to cut production) with COVID-19-induced economic weakness could push international benchmark Brent crude prices down to $30 per barrel. Both U.S. WTI crude and Brent crude recently posted their worst days since 1991: sliding 24.59% and 24.1% respectively.
3. Emerging markets, a bright spot
In the region where this virus originated, the growth rate of COVID-19 cases appears to have plateaued. Additionally, U.S. dollar strength has been on the decline since fears caused a spike in global markets on February 20, 2020. As a result, emerging markets have been staging a comeback against U.S. markets (measured year-to-date).
Sound Investment Principles
Whenever volatility increases in the stock market, there are several sound investment principles to remember.
1. Investment Time Horizon
The goal of investing in stocks is to pursue 10-year growth and outperformance. Investment dollars with shorter time horizons should be allocated to other asset classes.
2. Asset Allocation
Asset allocation is the process of determining what percentage of a client’s portfolio should be allocated to stocks, bonds, and cash. We believe having the right portfolio allocation is the most important aspect of investing and will have the greatest impact on future investment returns. This affords our investors the ability to weather market downturns when they occur, not should they occur.
3. Corrections Occur Frequently
A market correction is typically defined as a 10% decline in an index from a recent high. The chart shows that intra-year market pullbacks occur quite frequently. Stock market corrections occur on average every 12-18 months.
4. Stock Markets Work Over Time
There is a direct correlation between risk and return and stocks will generally outperform bonds over an extended period of time. What we have learned over the years is that time in the market makes the investor successful, not timing the market.
Our Goal for Clients Despite the Covid-19 Financial Market
Regardless of existing headwinds, our goal at SYM remains the same: to create and implement long-term portfolios that are customized to meet the needs of individuals and are designed to weather short-term volatility. We know investing is uncertain at times, and this uncertainty often feels amplified when observing it over short time horizons. But over the long-term, investing in a portfolio that is well diversified across the spectrum of financial markets is, we believe, a consistently fruitful strategy.
Emotions naturally distract people from the multi-year return prospects aligned with their investment horizons. Long-term return profiles must be kept top of mind when reading short-term headlines. Your SYM advisor stands ready to answer any questions or concerns that you might have.