Coronavirus and Markets
With the global pandemic of the coronavirus (COVID-19); restrictions on travel and large gatherings of people; steep declines in the stock market; and the escalating daily barrage of negative news and headlines, people understandably are concerned about the impact on their finances.
Stressful times often result in emotional decisions, which in hindsight, are frequently not wise. We strive to keep our heads and emotions level but understand the uneasiness many currently feel; therefore, we wanted to share our thoughts.
Both the human and economic toll from the virus is immeasurable. The number of COVID-19 cases in China is flattening out, suggesting their strict containment measures are working. However, cases outside China are accelerating, resulting in worldwide disruptions to travel and commerce, with an unknown economic impact. Meanwhile, researchers are scrambling to develop a vaccine.
FED & ECONOMY
Recently, the Federal Reserve dropped interest rates by 50 basis points (1/2 of 1%), with expectations for further cuts to come. Lower rates may help somewhat, but they are not a magic elixir. In addition to the Fed’s monetary actions, a governmental fiscal stimulus is being considered.
A fallout from COVID-19 is a major disruption to the global supply chain. If a company in the U.S. uses a component made in China, and the manufacturer in China can’t produce the component because its workers are at home – you have a supply chain problem. Supply chain blockages will eventually be fixed, and people will travel and cruise again – but there will be an economic cost that will most likely end the 11-year expansion and tip the economy into a recession. The good news is that COVID-19 hit the economy when it was strong and healthy and not in a weakened state.
Exactly one month ago, on February 12th, the Dow Jones average hit its peak, and has since declined about 28%, an astonishingly swift drop and pushing stocks into an official “bear market.” To put that in perspective, this decline occurred over just 19 trading days, the second fastest decline in history. Only the 1931 plunge was quicker.
Volatility has returned with a vengeance, as we have rarely seen the magnitude of these daily movements in the stock market. And, COVID-19 isn’t the only reason for the decline. Oil prices were already falling and then collapsed when Saudi Arabia launched a price war, pressuring the energy sector.
Although the news headlines focus on the stock market, it is important to remember that an investment portfolio is often not just made of up stocks. Cash, money market funds and bond funds are an important part of many portfolios – providing liquidity for distributions, income, and some protection from stock market volatility through diversification.
However, stocks and stock funds are certainly a key part of the growth portion of a portfolio and they are taking a beating at present. Looking at the news or your portfolio is painful right now, and we understand that. So, what should you be doing in response?
First, try to resist the temptation to “do something.” We, and you, are investors and not speculators. When the drumbeat of the news is depressing and the market tumbles, it is not the time to panic and sell, which only cements a loss. This does not mean that nothing should be done; rather it is an opportunity to examine the stocks and funds currently owned and determine if another offers a better risk/reward potential. This is what we are doing right now.
Whether you own individual stocks or stock funds, think of them as individual businesses. We don’t know how the “market” will price these businesses tomorrow or a month from now. But we do believe that successful businesses will be priced higher than they are at present. With that belief, and in the current environment, we are more interested in buying those businesses than in selling them.
Finally, remember that “this too shall pass.” We will look back at the current chaotic events as yet another challenging period that we endured and then moved on from.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. Townsend Asset Management Corp. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm can be found in its Form ADV Part 2, which is available upon request. TAM-20-20.