February 2020 in Review
Volatility exploded in the last week of the month as worries over the Coronavirus gripped financial markets, powering a mammoth risk-off money flow. The S&P 500 fell -11.49% on the week, and the index now is down -8.56% YTD.
Stocks had their worst week since the financial crisis in 2018, thanks in part to four primary issues:
1) Worries that the spread of Coronavirus would lead to a global recession and corporate earnings would suffer.
2) Fears of an economic recession would weaken President Trump’s chances of winning re-election (remember the market prefers Trump because he’s viewed as the most corporate friendly candidate)
3) An overbought & unworried market, which made the declines more forceful
4) Modern market machines—algorithms, quantitative funds and other high frequency trading strategies took over the market; it's probably that future corrections will move at the same speed and violence that we saw last week.
So what's next?
As I previously wrote about in last month’s newsletter, health epidemics always have volatility to the downside initially but seldom do negative returns last. If you would like another copy of last month’s newsletter, just shoot us an email. Observing the facts at hand, there are beliefs that the recent market sentiment is too pessimistic for the current environment. For one, production and economic activity in China are starting to rebound as evidence by Starbucks and Apple positive commentary on China activity. Perhaps the two most integrated American companies in China, the fact that they both had positive commentary is important. Lastly, there also reports of progress on the treatment of the disease in China. More people have recovered and are no longer sick than those who currently have the disease.
Looking ahead, the key to this entire thing is how long it lasts. If the Coronavirus fallout is limited to Q1 or Q2 only, the market should recover strongly. But if the fallout goes on past Q2 then the likelihood of a recession begin to rise sharply as well as contagion fears throughout the world.
For those contemplating either how to best take advantage of this dip or how to run for the hills, it is important to you stick to your ORIGINAL financial game plan that you established. If you don't have a plan, please come see me to get your house in order but for now, I would recommend that the best action to take is no action at all and here's why:
Did you know that missing even a few great market days could dramatically change portfolio returns over the long term? Below you will see the impact of not being fully invested (or cashing out at times) over the long term.
If you invested $10,000 from January 1999 to December 2018:
Fully Invested 100% of the time: 5.62%
Missed 10 Best Days:2.01%
Missed 20 Best Days: -0.33%
Missed 30 Best Days:-2.35%
Let's be honest, who is really going to miss the 10 best days? That has to be nearly impossible right? Wrong! Considering that six of the 10 best days,(the ones you really don’t want to miss) fell within two weeks of the 10 worst days! This is why sometimes the best thing to do is nothing at all.
Last week was scary but it presented an opportunity for clients to make an early contribution to their IRA or to reallocate some of their savings account surplus to better use because prices were low. If you didn't have additional money to invest, staying the course and not panicking was the next best thing to do!
Make it a great week & if you'd like to chat, feel free to reach out to us through our website or at our Boca Raton office.
Footnotes:
1.The sevens report: 03/02/2020
3. https://www.jpmorgan.com/securities/insights/the-beauty-of-doing-nothing