The Markets React
This week, the global financial markets got sick as a result of the coronavirus. Major U.S. stock indexes have declined about 8% over the past week while international stocks have fallen about 6% (2/18-2/26/2020). Hardest hit were stocks of companies that are related to travel or those that rely on components that are manufactured in Asia, such as technology companies and automotive manufacturers, as well as some retailers. Other asset classes have not declined as much or have gained as investors have sought safe havens as a reaction to the recent news. Real estate is down about 5% over the week, while the aggregate bond index is up around 1%.
What does this mean for the market and economy?
We know there will be an economic impact from the coronavirus; we just don’t know how long it will last or whether it will lead to a full-blown recession. Coronavirus could turn out to be a catalyst that sets off a prolonged economic downturn, though another possible scenario is a V-shaped economic cycle, where economic activity decelerates rapidly and then rebounds just as quickly due to pent-up demand after the virus threat is over.
Until this week, the last 13 months have been an extraordinary period for investors, with minimal volatility and above-average returns in nearly every asset class. This sudden and dramatic market swing, in contrast, may feel like a bucket of icy cold water. The news stories are alarming, and it doesn’t feel good to see your investment values drop. In fact, it can feel terrible, and when we feel this way, our first instinct is to feel like we need to do something, anything, to stop the stress – which is not the best course of action.
Across the globe many investors have done just that and have sought “safe harbor” investments, the safest of all being bonds issued by the United States of America. This week, high demand sent U.S. Treasury Bond prices upward and yields down. (Remember that in the world of bonds, prices and yields move in opposite directions.) On Tuesday, the 10-year bond yield fell to a record low of 1.305%. Said another way, if you lend $1,000 to the U.S. Treasury (which is what you are doing when you buy a Treasury bond), you will be rewarded with a whopping $13.05 in interest per year. After adjusting for inflation, this is a negative return.
Does one need to take any action in one’s portfolio?
During times like this, it’s so important to remind ourselves that there’s nothing new or unusual about what individual stocks are doing this week. Stocks are volatile and respond with lots of drama to all sorts of global events: pandemics, Brexit, and the like. If stocks were predictable and steady, investing would be easy.
We believe that to be a successful investor in a portfolio with exposure to stocks, you must have patience, optimism and the ability to manage your emotions. This can be hard work, but it is why stock investors have historically earned better long-term returns than bond investors. In the investment world, we have a name for the surplus returns of stocks over bonds: the “risk premium.” Times like this, when volatility spikes and investors panic, help keep the risk premium alive for the rest of us.
It’s also why we are here: to help you to stay the course. Changing one’s investment strategy and moving to “safe harbor” investments in response to current events is unnecessary and counterproductive. Modera investment portfolios are diversified, constructed to suit your goals and to be durable for the long term. Our financial plans incorporate worst-case investment scenarios which we hope will give you some comfort when the news is bad.
If you’re concerned about the markets or your financial situation, please give us a call. We can go into a deeper dive on the current situation with some additional resources that we’ve developed. Call us even if you’re not. We always love to hear from you!
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