March 23, 2020 Market Update
Posted 23 Mar 2020 by Rick Irwin, CFP, CLU
Markets globally experienced another challenging week as government efforts to massage the economy through what will undoubtedly be be a difficult period were not sufficient to calm down jittery investors. The latest news out of the U.S. is that President Trump is attempting to soon roll out a fresh economic stimulus package. He was reported by the press as saying that details will soon be shared on “very dramatic” economic initiatives. These measures might include a payroll tax reduction, infrastructure spending, and additional help for some of the most troubled industries like the airlines.
Meanwhile, the Bank of England just joined other major central banks by cutting interest rates by 50 basis points and offering targeted aid to businesses and banks. The U.K. government is expected to announce a major stimulus package today. Supportive fiscal measures are also planned by Italy, with details coming as soon as this Friday. The additional help is in response to the fact that the Italians moved from a regional to a national lock-down earlier in the week in order to minimize person-to-person contact and contagion.
Policymakers from around the world are on the move in an effort to offset the growing economic pressure being generated by the spread of COVID-19.
The catch-22 for governments is to simultaneously minimize the viral spread and the economic impacts of the viral spread. The only way to minimize spread, or what epidemiologists call “flattening the curve,” is to enforce widespread social distancing measures and aggressive ring-fencing around infected populations as evidenced in places like China and Korea. That causes even more economic distress in the short term. Measures that can help to limit the upfront economic dislocation resulting from the more important health requirements seem most appropriate at this stage.
This is all to say that financial markets are likely to remain volatile. Injections of policy stimulus are running head-on into episodic economic shocks from the viral spread. At some point the virus containment policy will be effective and life will resume and all of the things being put in place by world governments today will help the economy rebound once this takes place. Markets, too, will rebound in advance of this economic recovery just as they are now pricing in the economic shock that will occur as increasingly large parts of the world economy shut down temporarily. Temporarily
It is a challenging time to keep a level head, but that is what we must do. Portfolio construction decisions and an investment process were outlined beforehand, knowing times like these would be a part of the experience. History is rife with examples of volatility eruptions and significant investment drawdowns. There is also plenty of evidence showing powerful and unexpected counter-trend asset price moves. It is important to remind ourselves that diversification within predefined risk tolerance bands has been one of the most reliable ways to reach a long-term financial objective. Yesterday, for example, our client's portfolios were down a fair bit less than the market (your individual experience would depend on the level of stock market exposure within your account) and it's not just diversification; active management by individual fund managers is really showing through in this volatile period as not all stocks are declining to the same degree.
As you might expect, we have received a high volume of emails and calls as of late and we must apologize if it takes a little longer than normal to reply. We are all working hard and monitoring things and staying connected with the investment professionals that manage your money on a near-daily basis. If you would like to discuss your personal situation, do not hesitate to reach out.
In the meantime, be safe and stay healthy!