Contagion
After all that we’ve been through, it’s a virus that finally gets us.
That could be a prognosis for humanity in general, but it’s the story of the financial markets over the past 18 months.
The markets have fought off one headline after another. Worries of trade wars and tariffs, Brexit, an inverted yield curve, and tightening monetary policy have given markets jitters in the last year. But now, the fear is the impending global health crisis will be the tipping point.
No doubt the spreading virus is concerning. Exactly how the virus spreads and what is needed to contain it is unknown. This week, the Center for Disease Control warned the virus is expected to spread, at some point, within the United States.
Anecdotal evidence of factories unable to fulfill orders and the subsequent manufacturing disruptions unnerve investors. Almost certainly this will reduce business activity as the impact of the disruptions ripple through the global economy. The big question for investors is exactly to what extent?
That answer is unknowable, and that is what is so worrisome. The economic effects of containment have little historical precedent.
In just a few days, the S&P 500 and other global stock indices have pulled back over 10%. In fact, this has been the quickest 10% correction for the S&P 500 on record. Returns on high-quality bonds have been positive, reducing the impact on balanced accounts. No matter how many times we are reminded that 10% to 20% declines are a normal part of investing in stocks, it is always unsettling in the midst of one. Each decline happens under unique circumstances, and this time is no different.
It can be challenging to stick to the course when your gut suggests otherwise. But we aim to prepare our clients for the ups and downs in the stock market. It is important to maintain a long-term focus with a keen eye on your personal objectives.
In the meantime, here is what we are doing:
Ensuring our clients maintain the proper diversification to get through these volatility periods. This means keeping with your personal strategy that has been developed through careful planning.
Looking for opportunities to harvest tax losses. Short-term swings in markets can create opportunities to reduce current year tax bills. We carefully take advantage of situations while minimizing the impact on investment performance.
Avoiding chasing returns or timing the market. The market swings will naturally create opportunities to stay with a long-term plan if well-diversified.
The volatility is most likely not over. Attempting to time the market amid such wild swings greatly increases the change of being whipsawed, ultimately detracting from long-term performance.
We will keep you informed of new developments and our thinking as this situation continues to unfold. In the meantime, don’t hesitate to contact us if you would like to discuss your personal situation in more detail. We are here to help.
Contact us at 865-584-1850 or info@proffittgoodson.com
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