Over the past few weeks, there has been extreme volatility in the financial markets. As such, we wanted to take a few minutes to shed some light on what we know today, what the government response looks like so far, what it means for your investment portfolio in the short term, and what additional changes we are likely to recommend.
What do we know today?
- The U.S. stock market has officially entered a bear market (20%+ decline from peak on February 19)
- COVID-19 (Coronavirus Disease 2019) has spread across the globe and is present in more than 100 countries
- Total confirmed cases currently exceed 130,000 (with likely many more unreported/unconfirmed causing uncertainty about the death rate)
- It is likely a matter of days before cases outside of China exceed those within China
- Schools, sporting events, parades, conferences, and social gatherings are being canceled to prevent the spread of the virus
- Economic growth is slowing and is likely to contract if consumers and businesses continue to cut back on spending and travel to avoid contracting the virus
- Leisure, entertainment, and travel industries are likely to be hit hardest
- Oil prices have fallen sharply due to a price war between Russia and Saudi Arabia
- The low oil prices are great for drivers and energy users, but bad for energy producers in the U.S. (and those who work for or service those companies)
What does the government response look like so far?
- There have been numerous quarantines, travel restrictions, and travel bans to limit the spread of the virus domestically and abroad
- The Federal Reserve has cut interest rates by 0.50% to help lower borrowing costs for consumers and businesses
- The Bank of England also cut interest rates
- The Federal Reserve has increased both overnight and short-term lending to financial institutions to increase liquidity and the availability of cash (up to $1.5 trillion)
- The European Central Bank has also increased low-interest loans to Eurozone banks
- The Federal Reserve will purchase $60 billion of assets to increase liquidity in fixed income markets
- The European Central Bank will also purchase an additional €120 billion
- U.S. government-backed loans will be issued to companies hit hardest by recent events. These loans are expected to help keep those businesses alive and their employees at work until the situation normalizes.
What does it mean for your investment portfolio in the short term?
- For investors currently depending on their portfolios for spending needs
- We periodically raise cash within portfolios, from risky assets when prices are high and from safer assets during times of distress
- As such, clients in the spending phase of their life likely held several months’ worth of distributions in cash prior to the recent stock market turbulence
- We believe in diversification and have continued to hold core bonds in the portfolio despite the unattractive interest rates they have offered over the past few years
- For clients in the spending phase of their life, a typical core bond position is likely sufficient to fund 5-10 years of distributions if necessary
- For clients in the accumulation phase of their life, core bonds act as a stabilizer to help reduce the magnitude of stock market swings. Also, should stock prices fall enough, core bonds can be converted to cash and used to purchase risky assets at reduced prices.
What additional changes are we likely to recommend?
- We have seen numerous economic downturns, stock market declines, and general times of unease during our careers. Each incident is unique based on the circumstances that preceded it or the unforeseen event that led to the decline. The unique characteristics surrounding each incident, how it unfolds over time, and how businesses, consumers, and investors react to the stress tends to determine the length and severity of the incident.
- Neither we as advisers, nor you as investors can control the events as they unfold
- We do not (nor does anyone) know when the virus will be contained nor when large swings in the stock market will end
- The asset allocation decisions we made months ago and our ability to remain focused on the long term are what will determine how well we preserve wealth during times of stress
- As advisers, we will not attempt to time the market or recommend selling out of risky assets and later purchasing them back at a future date. Research has shown it is difficult (if not impossible) to predict BOTH the correct time to sell stocks before a drop and also buy them back before the recovery.
- Instead, our focus will be on recommending changes we believe will benefit our clients over a multi-year time period so they can reach long-term goals and objectives. We will likely recommend reducing some asset classes and increasing others based on beliefs of their ability to generate cash flow several years from now.
- We will look to reduce your long-term tax liability by performing tax-loss harvesting trades when we believe the timing is appropriate
- We will be your rock, help you remain focused, and work hard to avoid knee-jerk reactions, which can cause significant financial damage for years to come. Although these days may seem dark, there is light at the end of the tunnel, and we will be here to help you along the journey.
This publication contains general information that is not suitable for everyone. All material presented is compiled from sources believed to be reliable. Accuracy, however, cannot be guaranteed. Further, the information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this publication will come to pass. Past performance may not be indicative of future results. All investments contain risk and may lose value. © March 2020 JSG
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