Insight on Recent Market Volatility
After an uneventful start to 2020, the world is now watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.
Stocks tumbled for a seventh consecutive day on Friday, with the S&P 500 index falling about 0.8%, bringing its loss for the week to about 11.5%. It was the worst weekly decline for stocks since the 2008 financial crisis.
It was not much better for international markets. In Europe, Britain’s FTSE 100 fell more than 11.1% and the Dax in Germany fell more than 10.3%. In Asia, the Nikkei 225 in Japan closed down 9.7%, the KOSPI in South Korea dropped 9.1%, and the Shanghai Composite in China dropped 4.8%.
At Gap Financial, we believe it is a fundamental principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happening when markets decline sharply, as well as when they rise. Such declines can be distressing to any investor, but market declines, like we experienced last week, have led to respectable future results:
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. Apple announced earlier this month that it expects revenue to take a hit from problems making and selling products in China1. Australia’s prime minister has said the virus will likely become a global pandemic2, and other officials there warned of a serious blow to the country’s economy3. Airlines are preparing for the toll it will take on travel4. Federal Reserve chairman, Jerome Powell, in an attempt to soothe jittery investors, issued a short statement Friday afternoon reaffirming that the central bank would use its tools and “act as appropriate to support the economy.” While Mr. Powell said that the “fundamentals of the U.S. economy remain strong,” he also stated that “the coronavirus poses evolving risks to economic activity” and that the Fed “is closely monitoring developments and their implications for the economic outlook.” And these are just a few examples of how the impact of the coronavirus is being assessed.
The market is clearly responding to new information as it becomes known, such as Powell’s statement on Friday afternoon, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding volatile growth assets like stocks.
We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making wholesale changes to a portfolio based on fear or speculation, even as difficult and traumatic events transpire.
We build portfolios that consider a wide range of possible outcomes, both good and bad, when helping clients establish an asset allocation and financial plan. Those preparations include the possibility, even the inevitability, of a downturn. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of academic research and long-term investing principles remain a strong guide.
Footnotes
1Apple, February 17 press release. https://www.apple.com/newsroom/2020/02/investor-update-on-quarterly-guidance/
2Ben Doherty and Katharine Murphy, “Australia Declares Coronavirus Will Become a Pandemic as It Extends China Travel Ban,” The Guardian, February 27, 2020. https://www.theguardian.com/world/2020/feb/27/australia-declares-coronavirus-will-become-a-pandemic-as-it-extends-china-travel-ban
3Ben Butler, “Coronavirus Threatens Australian Economy Reeling from Drought and Fires,” The Guardian, February 5, 2020. https://www.theguardian.com/business/2020/feb/05/coronavirus-threatens-australian-economy-reeling-from-drought-and-fires; Ed Johnson, “Australia Says Economy to Take ‘Significant’ Hit from Virus,” Bloomberg, February 5, 2020. https://www.bloomberg.com/news/articles/2020-02-05/australia-says-economy-to-take-significant-hit-from-virus
4Alistair MacDonald and William Boston, “Global Airlines Brace for Coronavirus Impact,” The Wall Street Journal, February 26, 2020. https://www.wsj.com/articles/germanys-lufthansa-makes-cuts-as-it-braces-for-coronavirus-impact-11582712819
Disclosures
The information does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.