What's an Investor to Do?

Well, what else can I say other than it’s getting scary out there. At this point we’re all aware of the almost hour-by-hour nature of the evolving virus situation and the new addition to our lexicon: social distancing. This concept will have broad and unanticipated impacts on our local and national economy. The past few days also brought sweeping changes from the Federal Reserve to help grease the financial skids, so to speak, as we prepare for a virus-induced recession.

In terms of your portfolio, it’s time to hunker down. But this doesn’t mean selling everything and burying cash in the yard. Instead, it’s time to focus on fundamentals and trying not to do anything rash. The stock market will find a bottom, likely before the virus situation stabilizes.

This is a psychological challenge for those of us who are independent problem solvers and doers. We see a problem and want to fix it. The problem now is that there’s very little to do in this situation (besides rebalancing as needed, which I’ve discussed already). What you can do instead of focusing on market movements is focus on your health and wellness and getting behind this whole social distancing thing.

While this is all feeling very 2008-ish in terms of market volatility, it’s important to remember our current predicament is fundamentally different in many ways. For example, businesses and consumers entered this situation on a stronger financial footing. Many states have healthy emergency funds. Property values aren’t unnaturally high. Unemployment is very low. The global financial system is healthy. This is all a positive contrast to 2008.

But like 2008, some of the best market days have come right in the middle of the worst days. Last Monday was horrible. Thursday was one of the worst days in recent memory and Friday was the best since 2008. Then yesterday was downright nasty, the fourth worst on record for the Dow. What’s an investor supposed to do except hold on for dear life?! While it’s probably hard to reconcile, we know throughout the long history of the market that missing the best days makes it incredibly hard to keep pace over the long term. We simply must endure the worst to also get the best.

It's important to remind ourselves of this as we go forward into the unknown unknowns of this outbreak. Among the many things we don’t know, just one has to do with the economic cost of social distancing. Yesterday JPMorgan sent out a note discussing its potential impact on the Leisure and Hospitality industries, which account for over 18 million jobs. Some of these are “corporate” jobs where laid-off workers get some support, but many are small businesses that will simply have to close until this all blows over. What will the owners and their employees do to recoup lost income? How will this affect their spending habits and what will the impact be on the broader economy? While this situation is temporary, it will be painful in various ways for most Americans.

Government can help here with a “shock and awe” fiscal stimulus package. This would coordinate with the Fed’s action this past weekend to drop short-term interest rates to effectively zero. The Fed is also restarting its quantitative easing program (QE) employed during and after the Great Recession. The idea with QE is that the Fed pumps money into the financial system by buying hundreds of billions worth of Treasury and mortgage-backed bonds of various maturities. This, and other Fed programs, is the extra grease I alluded to earlier.

Policy coordination between fiscal and monetary stimulus is the missing link at this point. That’s what investors and the American people are waiting for (among other things, of course). Broad stimulus coupled with extremely low interest rates and QE would reduce some of the rampant uncertainly out there while we do whatever we need to do to let this virus play out.

In the meantime, markets are likely to stay extremely volatile. We almost need new words to describe the current environment since “volatile” and “uncertain” don’t seem to do it enough justice. Put simply, unless a major stimulus package (or a miraculous reduction in coronavirus cases) is announced, this market situation will get worse before it gets better. There could be such a package as early as today, so fingers crossed for a good one.

Buying opportunities could become plentiful should the markets take another leg down, so I’m preparing for that on your behalf. And if you’re wondering, fortunately my work for you doesn’t have to stop due to social distancing or even a shelter in place order. So long as the Internet keeps functioning, I have full access to markets, your portfolio, your plan, and well… everything.

Have questions? Ask me. I can help.

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