The Wrong Kind of Record to Break

Last week was the fastest fall from a recent record high in the stock market’s history. Think about that for a moment. The average stock fell faster last week from its recent high point than anytime during the financial crisis or even the Great Depression. Those losses were deeper, of course, and took longer to play out while last week was all about speed. And the cause wasn’t a mortgage crisis or other financial calamity… it was the flu. 

Now, I’m not trying to make light of the coronavirus outbreak. To date the virus has infected over 90,000 people around the world and claimed almost 3,000 lives, according to evolving reports. We’ve also had the US’s first deaths from the virus up in Washington state. And now we’ve learned about confirmed cases closer to home. Unfortunately, more are sure to follow.

The outbreak and its potential domestic impact are serious issues, but is it worth a one-week market correction of over 12%? I recall a day last week when only eight stocks in the S&P 500 were positive. Are all the other stocks really worth that much less? Obviously, sellers didn’t discriminate and I’m sure many people simply sold everything. A Wall Street Journal article from this past weekend told of 401(k) plan participants across the country trading 11x normal in their plans at work. Big short-term swings are part of the investing landscape, but last week sure seemed overdone.

In truth, the stock market had been riding high for quite some time and many investors were looking for an excuse to take profits. It could have been caused by anything. It wasn’t slowing global growth (pre-virus, of course), the trade war, or even impeachment. Investors largely looked through those issues and moved on. But the visceral fear of a foreign virus crossing oceans proved the right mix that caused just enough angst to create a panic.

It’s important to allow for market corrections from time to time. We experienced a nasty one just two years ago and stocks came roaring back. Fortunately, this outbreak is taking place when our economy seems to be getting stronger, or at least is not at imminent risk of recession. We had a couple of recession head fakes last year, but consumers and businesses have been reporting increasing levels of confidence. Maybe the virus changes this trajectory?

If US consumers and businesses start altering their habits due to the coronavirus, economists like former Fed Chair Janet Yellen say this could potentially tip the economy into recession. Along these lines, just this morning the Fed surprised markets by announcing it was lowering short-term rates by half a percent. Investors had been anticipating a reduction like this, but not until later this year and certainly not due to a virus. This kind of reduction is a double-edged sword, so it will be interesting to see how markets respond.

Amid all the stock market declines high-quality bonds have been up. This was expected and, by the way, is a big reason why we want to own them in the first place. For those of you who are currently retired, you can pick from your bonds to fund cash needs instead of selling stocks when they’re down. If managed correctly, the right kinds of bonds can be a store of cash to get you through a prolonged downturn for stocks. This is also why we don’t favor the riskier kinds of bonds that tend to behave like stocks when they’re taking a beating.

Because of all the buying in the bond world, yields are now down to historic lows (yields down = prices up). As of this morning, if you bought a 10yr bond from the government you’d be locking in a whopping 1.04% annual return. This has helped lower rates on mortgages, for example, so it might be a good idea to call your mortgage broker and ask about refinancing!

In all seriousness, we’re not out of the woods yet in terms of the virus’s potential impact on our economy. And the Fed’s decision this morning is a complicating factor. Even though stock prices rebounded strongly yesterday (the best single day in years!), there could be more wild swings and scary news from the firehose in the coming days and weeks.

For my part, I’ll be trying to sort through all the noise while continuously monitoring your investments and rebalancing as needed. My suggestion for you, for whatever it’s worth, is to continue keeping a cool head and to monitor websites like www.cdc.gov for useful information about what, if anything, to do about the virus.

Have questions? Ask me. I can help.

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