In the Wizard of Oz, Dorothy says to her little dog, “Toto, I’ve a feeling we’re not in Kansas anymore.” Today, many of us understand Dorothy’s trepidation and uncertainty better than ever before. COVID-19 has changed our world in ways previously unimaginable. In many states, Americans shelter at home. We venture out for groceries, medicine, and other essentials. Parents have become teachers guiding online schoolwork, often while balancing their own work and online meetings. We are learning to manage the loneliness, frustration, and anxiety that accompany quarantine conditions. Many companies are laying off or furloughing workers. Others have put equipment and technology in place to allow continued or remote operations. Our collective hope is the curve will flatten. We may be seeing progress.
In the world of investments, despite solid performance early on, the first quarter of 2020 was one of the worst ever for U.S. stock markets. At the start of the quarter (and the year), investors were confident despite concerns about trade. Many asset classes finished 2019 on a positive note. The Standard & Poor’s 500 Index and the Dow Jones Global (ex U.S.) Index both finished the year with double-digit increases. Bonds and gold delivered positive returns, too. Though this week and next week were likely to be horrible, we have seen some positives in terms of the rate at which the negative variables seem to be progressing.
Markets stuttered in January when conflict arose between the United States and Iran but recovered quickly as tensions eased. Soon thereafter, the United States and China reached a preliminary trade agreement. Investors were thrilled and the Dow Jones Industrial Average surpassed 29,000 for the first time ever.
It wasn’t until late January that news of the coronavirus outbreak in China began to unsettle investors. Many were concerned that precautions designed to slow the spread of the virus could also slow China’s economic growth and, by extension, global economic growth.
However, major U.S. stock indices continued to gain value in February. At the time, Ben Levisohn of Barron’s reported, “They say the best defense is a good offense. The U.S. stock market may offer both… loading up on U.S. stocks looks like the right move. That’s because the world’s problems [coronavirus in China and lackluster economic growth in the European Union] might actually make U.S. markets more attractive.”
The early-March decline in U.S. stock markets was triggered by price wars in the oil market. Saudi Arabia and Russia failed to reach an agreement about output, which sparked the price war. The subsequent supply and demand imbalance – the market was glutted with oil in a time of falling demand – caused oil prices to drop sharply.
Demand for oil continued to drop as coronavirus spread into more countries. U.S. stocks reflected concerns that COVID-19 could become the catalyst for recession in the United States and elsewhere, reported Heather Long and colleagues at The Washington Post. Uncertainty increased when, during U.S. earnings calls, many companies were unable to quantify the potential impact of coronavirus on their businesses.
As the potential human toll of the virus became better understood, many states closed non-essential businesses and issued shelter-in-place orders. Investors began selling shares to ensure they had cash available. As a result, shares were sometimes sold at low prices with little regard for long-term performance potential.
It is possible we have passed the point of peak uncertainty. While the exact dimensions of the coronavirus remain unknown, investors’ fears have begun to recede. Barron’s reported the CBOE Volatility Index (VIX), Wall Street’s fear gauge, closed below 50 last week for the first time since early March. That is meaningful.
During this unusual period, I’ve made a few observations. One is the disparity between credible economic forecasts. Some see this is the last, best opportunity of their lifetime. Others see it as the end of our financial/economic system as we know it. That’s what happens when no one really knows and there are not true historical precedents upon which to rely. The discussion this time is different than prior downturns. The ultimate outcome of our financial/economic plight is being decided by factors outside the world of finance.
Another observation is that the world of finance communicates differently than that of medicine/healthcare – and certainly that of politics. Yet the most articulate, entertaining, perhaps loudest voices do not come from the highly educated, scientifically disciplined world of medicine. I’m noticing that this differential is not favorable, and I think you should be careful and listen to the medical data driven experts that matter.
In closing, once again let me encourage you to strap yourself in. You’ve already seen what panic selling/emotional decisions can do. Don’t try to market time in search of “the bottom.” Dollar cost average if you’re buying depressed, fundamentally sound investments. Rebalance if you are already fully invested. Be patient, be safe and know there are betters day ahead.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.
Visit us at www.williamsfa.com. Tommy Williams is a CERTIFIED FINANCIAL PLANNER™ Professional with Williams Financial Advisors, LLC. Securities offered through Private Client Services, Member FINRA/SIPC. Advisory Services offered through RFG Advisory, a Registered Investment Advisor. Williams Financial Advisors, LLC, and RFG Advisory are separate entities from Private Client Services. Branch office is located at 6425 Youree Drive, Suite 180, Shreveport, LA 71105.