Update on the Markets

April 1, 2020

Key takeaways

• Stunning drop for stocks
• Oil and energy even worse
• Diversification Works
• Stay Invested

My thoughts and prayers are for the safety and well-being of our families, friends, and clients. And a special salute to our healthcare workers! These are the strangest of times. The COVID-19 pandemic is affecting everyone on a global scale. Millions are losing their jobs. Thousand of businesses are shutting down. But we are resilient and resourceful. The near-term may look frightful, but I believe that we will rebuild our economy and our lives. 

A Few Scary Stats to Start Off 

The S&P 500 index dropped almost 20% in the first quarter, the worst showing since the fourth quarter of 2008 and the ninth-worst three-month era on record. Even more remarkable was the speed of the drop. It took only 22 trading days for the S & P 500 to drop from its all-time high on February 19 to its recent low on March 23 – the fastest drop ever. You have to go back to the Great Depression to find comparable declines. The S & P 500 also experienced its most rapid correction (a drop of 10%) and the quickest bear market (a drop of 20%). It was a stunning end to the longest bull market ever. 

Oil Tumbles 

Making matters even worse, Saudi Arabia and Russia embarked on a price war, failing to curtail production of oil amidst a considerable drop-off in demand due to disruption in business and travel. The world is swimming in oil. US oil prices fell 66% in the quarter – the largest drop ever. Losses in energy stocks more than doubled the losses in the overall market. Blue-chip companies like Exxon Mobil and Chevron dropped over 40%. Many shale oil producers may go out of business. 

Bonds, for the most part, performed well in the first quarter. The yield on the US 10-year Treasury dropped to historic lows – briefly touching 0.32% on March 8 –  and ending the quarter at 0.69%. Many high-quality bond funds are up over 2% (bond prices move in the opposite direction of yields). Quality bond returns were way north of 4% before indiscriminate selling of all liquid assets affected their prices. Junk bonds, while down, are not down nearly as far as stocks. Municipal bonds were slightly negative due to concerns about the financial health of states and municipalities. 

Diversification Works 

All of this to say that diversification worked! No portfolios suffered the kinds of losses we witnessed in the S & P 500, or even worse, small stocks and international stocks. A portfolio split evenly between stocks and bonds lost approximately 11% in the first quarter. Compare that to losses in the S & P 500 (-20%), US small stocks      (-31%) or international stocks (-23%). Although it doesn’t guarantee against loss, diversification can minimize the volatility of your portfolio and help you stay invested, so you reach your long-term goals. 

Stay Invested 

Staying the course during volatile times is difficult. It is tempting to anticipate market movements and invest accordingly. Don’t do it! It’s incredibly difficult to time the market, and even the best professionals can’t get it right. You have to be right twice: when to get out and then when to get back in. Almost impossible. By selling, you don’t want to convert a temporary decline into a permanent loss of capital. Good days (and bad days) are unpredictable. By staying invested, you participate in the long-term uptrend of the market. In a study from Retirement Researcher, if you missed the best day during 1970-2015 (more than 11,000 trading days), your retirement assets would have been 10% lower. If you missed the best 15 days, your retirement assets would have been 60% lower! Although it can get scary at times, staying invested is the key to success. 

Please let me know if you have any questions or concerns.  

Sincerely,

Henry