What Now, Part 2?

The word “historic” is way overused, but today was a historic day.  Equities around the world sold off in all-time record numbers due to fears about the coronavirus and the consequential impacts on global growth (slower), oil prices (very much lower), high yield bonds (prices lower and spreads much wider) and safe treasury bonds (prices very much higher, yields very much lower).

Everyone has read the headlines, so no need to recount everything here.  Certainly, oil prices (including some geo-political intrigue), oil companies, and travel-related industries are leading the markets lower, but all sectors and markets are suffering.  The question everyone wants answered is, “What now?”; a question I already posed last Thursday, March 6, here:  https://www.dattilioash.com/our-blog/2020/3/5/what-now.

The last time the markets come close to this much volatility was the Financial Crisis in 2008.  That period of time saw a “drawdown” of -55% in the S&P 500 and lasted 1.4 years from “peak-to-trough” before heading back up.  So, it was painful then and it feels painful now; but we recovered from that crisis and I expect we will recover from this crisis. 

Unlike the Financial Crisis, however, this is a unique economic shock where actions taken by policy makers will dictate the depth and duration of the shock.  Aside from activities needed to quell the coronavirus, I expect there to be fiscal actions to support economic activity and capital markets in the U.S. and around the globe.

No one could have forecast the developments of the past week and no one can forecast when the markets will recover.  In situations like this it is best to “sit tight” and let the market psychology work itself out; certainly, that is what happened during the Financial Crisis and this is what I expect will happen during this crisis. 

As always, it is critical to have your investment portfolios managed to the appropriate risk profile for your specific personal situation.  If you have a long term time horizon with a well-diversified risk-managed portfolio that is consistent with your risk tolerance, I expect that this situation will just be an unfortunate blip in your financial life.  Aside from some small amounts of tax-loss selling that could benefit taxable accounts, I am not selling equities right now; best to let the dust settle before participating in this current market.