Market Update: March 16, 2020
Over the last few weeks, we have witnessed unprecedented turbulence in the financial markets as the coronavirus pandemic spreads across the world. We understand that our clients are concerned. Below is an update on how the recent market events are impacting your retirement plan(s).
- Policy makers are in the process of rolling out monetary and fiscal stimulus packages to counter the economic fallout of the worsening pandemic
- Market drawdowns have been swift, as the uncertainty from this virus has led to a flight-to-quality environment across most asset classes
- Asset category decisions provide participants the ability to build a diversified portfolio designed to weather market dislocations
We are beginning to see a massive policy response to the worsening crisis. Since the beginning of the year, the Federal Reserve has slashed interest rates to zero, re-started its quantitative easing program, and is taking steps to boost liquidity to stem the economic fallout caused by the pandemic. Government officials have rolled out an emergency spending bill to combat the virus and more fiscal measures are likely to be forthcoming in the days and weeks ahead. The good news is the U.S. economy was on solid footing before the crisis started, which should help cushion the blow.
Fixed income sectors have mostly acted as a ballast to the recent equity market volatility as interest rates have declined significantly since the beginning of the year. For example, the 10-year Treasury yield has fallen from 1.92% to a low of 0.31%. At the time of this article’s publishing, it is currently yielding 0.74%. The Bloomberg Barclays U.S. Aggregate has delivered a 2.36% return through the close of business on Friday, March 13.
With the economy expected to slow substantially as the coronavirus spreads, corporate credit markets have come under pressure. The credit sensitive sectors of the market (i.e., high yield and emerging markets debt) have underperformed as spreads have widened substantially in recent weeks. However, all bond market sectors have held up considerably better than equities during the most recent downturn.
Global equity markets have come down significantly from their recent highs in February, due to the spread of the coronavirus. Widespread quarantine mandates and travel restrictions will have a negative impact on GDP. The extent of that impact is not yet clear. As a result, global stock markets are pricing in the damage. Financial markets do not like uncertainty.
The 11-year bull market finally ended last week on Wednesday, March 11, when the Dow Jones Industrial Average dropped 20% below its all-time high. It only took 20 trading sessions for the Dow to decline 20% from its all-time high. This was the fastest 20% decline from an all-time high in market history. There has been a flight to cash in the market as investors flee stocks and non-investment grade bonds. Gold and silver were also not immune to the selloff. Additionally, the issues at hand will have differing impacts on the various sectors of the market. As of the close on March 13, the energy sector of the S&P 500 lost 47% YTD and financials lost about 25%. It is worth noting that the price war between Russia and Saudi Arabia has been somewhat lost in the shuffle and has hurt energy prices. However, the coronavirus is having a notably negative impact on travel and airline companies, manufacturing, and other consumer discretionary stocks.
To combat the economic impact of the coronavirus, the Fed has lowered the overnight rate to zero and engaged in a massive amount of repo funding. The Fed’s willingness to assist is positive, but ultimately the market wants good news around the coronavirus. Below are the year-to-date returns for key stock market indexes as of the close on Friday, March 13:
Source: Morningstar (as March 13, 2020)
What this Means for Retirement Plan Participants
Plan participants will continue to experience volatile returns until the coronavirus issue is resolved. The timing of that resolution is uncertain. Individual investors will understandably be nervous. Stocks will continue to react negatively to bad news and developments around the coronavirus. However, any positive headlines around a reduction in cases or the development of a vaccine or treatment would likely be well-received by the market. Concepts like “long-term focus” and “patience” may get bandied about a lot by advisors, but these concepts are reinforced for good reason. It is easy to be patient and focused on the long-term when stocks are in a bull market. However, market turmoil can invite bad investor behavior, like panicked selling or market timing. It is critical that participants stay the course.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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