Another week passed with stock markets fluctuating wildly.
Even after Friday’s (March 13, 2020) gains, the S&P 500 and NASDAQ indices both ended the week down more than 8%. After previously lowering short-term interest rates, the Federal Reserve announced they would make available as much as $1.5 trillion to combat the economic effects of the Coronavirus. But even after taking this dramatic step, the Fed is still widely expected to cut short-term rates again – possibly all the way to zero.
Uncertainty surrounding the Coronavirus is causing this volatility in the markets.
So much remains unknown:
- When will the virus be contained?
- What level of disruption to the global supply chain will it cause?
- How much will corporate earnings be affected?
- Will all of this cause a global recession?
Recall that stock prices are largely driven by expectations for future corporate earnings. Right now, the outlook for earnings is uncertain. Effects of large-scale quarantine efforts in China and other nations is beginning to be felt by U.S. companies. However, the full scope still remains to be seen.
Even if we enter into a recession, the U.S. consumer is substantially better-positioned to withstand it, compared to 2008. Consumer net worth is higher, the percentage of disposable income going toward debt service is lower and savings rates are greater than during the last recession.
Our base assumption is that economic growth will decline in the short-term (possibly resulting in recession), but that once the virus is contained and the economic effects quantified, we may recover quickly. Keep in mind that markets always look forward to predict future earnings and may or may not react to current events. It is possible that market recovery could take place while the toll from the virus rises.
Periods of great uncertainty are inevitable during our investing lives. This can be quite unsettling, but is surmountable. The key is not to allow these short-term setbacks to keep you from achieving longer-term objectives. It’s normal to be concerned about your portfolio during these market swings. We continue to closely monitor the markets and are available for discussion at any time. We are not deterred by volatility and remain steadfast in our commitment to you.