Volatility has surged in financial markets, as investors react to the potential economic and earnings fallout from the rapid spread of COVID-19. Given this historic volatility, we wanted to provide you with a market update that helps to separate fact from fiction and put this market turmoil in the appropriate context.
In late February and throughout March, equity markets dropped sharply as new cases of the coronavirus surged across the world. That is the primary but not the only reason for recent declines. As of this writing, there are over 2,000,000 cases of coronavirus worldwide. In the U.S., 584,000 people have tested positive for COVID-19.
Markets became aware of the virus in late 2019 but it did not have a material negative influence on U.S. stocks and bonds through most of February because almost all active cases were in China. The hope was to contain the virus there, however that effort failed. In mid-February, cases appeared in South Korea, Iran, and Italy. The spike in cases outside China resulted in a sharp drop in stocks in late February.
Those declines compounded in early March as U.S. cases rose. The S&P 500 tumbled over 10% amid rising fears the epidemic was becoming a pandemic.
On March 9, U.S. markets and the economy were surprised when Saudi Arabia abandoned OPEC-mandated production levels and began to discount oil prices and increase oil production. The move was in direct response to Russia refusing to comply with “OPEC+” production cuts, and a price war broke out between the two countries. Oil futures collapsed nearly 25% in a day. In the past, low prices have been good for our economy, but now the U.S. is the largest producer of oil in the world (U.S. energy industry valued at over $340B). With oil so low, many U.S. energy firms will have to reduce production and payroll, which affects both earnings and the economy. This price war directly contributed to the markets taking another leg lower during the week ended March 13.
Finally, in mid-March, stocks dropped even more in response to social distancing being implemented across the country. These measures, which included travel bans, canceling every major sports season, closing dine-in restaurants, mass work-from-home practices, school closures, and curfews, are designed to stop the spread of the virus. This will have significantly negative impact on the travel, leisure, beverage and restaurant industries, among others. The cumulative impact increases chances of a recession in 2020, which no one considered possible just six weeks ago.
Positively, the U.S. government took steps to support the economy by enacting three stimulus plans over the past month, the largest valued at $2.2 trillion. Each is designed to help a portion of our population bridge the economic gap until spread of the virus peaks and declines.
The Federal Reserve cut interest rates to zero percent to help the economy and implemented several measures to provide short-term cash for corporations to guarantee plenty of capital for the broader banking system. Those measures help keep banking and financial systems functioning in an orderly manner.
Despite all this support the world still looks scary to many people .
Roads are empty, offices vacant, schools closed and much of life as know it has shut down. Yet it’s important to remember this historic market volatility, along with these societal disruptions, are temporary. At some point, the virus will recede.
Social distancing is temporary. Children will return to school and adults to work. Air travel will resume, cruise ships set sail again, and our economy, by far the most resilient in the world, will recover.
Over the past several weeks, we’ve witnessed panic, both in society and in financial markets. Fear of worsening events is what drives that panic but panic is the worst thing to do. Panic leads to hasty decisions that jeopardize your long-term best interests.
While we could not foresee this virus or its impact on the market, this is why we design long-term, balanced financial plans.
Through this painful time, that plan is designed to help you achieve your long-term financial goals. Meanwhile, shares of some of the most-profitable, well-run companies are trading at levels so much lower than a month ago, and in the long term, these episodes can create fantastic investment opportunities, and some of the most ideal buying conditions the market can offer.
We are all in this together. We remain committed to helping you navigate this difficult environment — and maintain the primary goal of achieving your long-term financial objectives.