Market Volatility March 2020
We’ve witnessed an extraordinary move in the financial markets over the past week and a half.
Sudden market downturns can be unsettling and even more unnerving as it’s caused by the coronavirus. In times like this, we understand it can be difficult to stay committed to an investment program when fear has gripped the financial markets.
Here is how we are thinking about the current market situation:
- Valuation: The S&P 500 is now trading at ~18x trailing earnings, below the median P/E (21.3x) for the U.S. stock market over the last decade.
- Takeaway: Stocks look reasonable at these levels, making the case to continue owning stocks for the long-term. Since 1926, U.S. stocks have averaged ~10% annualized returns.
- Earnings: Pre-coronavirus, Wall Street expected earnings for the S&P 500 to grow in the mid to high single digits in 2020. We should expect downward earnings revisions are coming, possibly leading to little to no earnings growth in 2020. If the coronavirus hurts the economy and thus earnings for 1-2 quarters, the economy could have significant pent up demand, leading to a strong second half of 2020 recovery. If not, markets could have more to fall in the short-term.
- Takeaway: The big unknown is how long the coronavirus will last. Looking out 3-5 years, we believe earnings will continue to rise for U.S. companies, presenting a good fundamental reason to continue owning stocks at these levels. Economic confidence should return once the virus subsides.
Some possible catalysts that could provide a market recovery are:
- The U.S. Federal Reserve continues to support the economy. On Thursday, March 12, 2020, the Fed announced that it will ramp up overnight funding operations to more than $500 billion. In addition, the Fed will offer more liquidity to the system totaling $1 trillion on Friday, March 13, 2020.
- The U.S. Government may take action. There could be additional relief in the form of payroll tax cuts and increased government spending.
- There is a possibility of a coordinated G-7 approach to help from a global perspective.
- Large and small companies as well as local municipalities are imposing tougher restrictions to limit the spread of the virus by implementing work-from-home policies and cancelling conferences.
During a volatile period like we are in today, a quick look at recent history helps us keep these events and possible catalysts in perspective. Looking at the impact of allocation on a portfolio during the 2008 – 2009 financial crisis illustrates an important lesson. The following is an excerpt from last week’s Barron’s magazine.
“. . . while an all-stock portfolio may have been terrifying as the last bear market turned $10,000 invested in September 2007 into less than $5,000 by March 2009, according to Morningstar, other mixtures were less alarming. In a simple 60/40 portfolio of the S&P 500 and long-term government bonds, an original $10,000 would have turned into $7,817. In a 50/50 portfolio, an original $10,000 would have turned into $8,479 at the market’s nadir.
By April 2010—only about a year after the low point in the bear market —the 50/50 portfolio would have been back to even, and the 60/40 portfolio would have recovered about four months later, according to Morningstar. For an investor who let his or her portfolio allocation move to 80/20 just before the bear market began, it wouldn’t have returned to even until November 2011. Fast forward to the end of this past January: $10,000 that was invested in a 50/50 portfolio in September 2007 was worth $25,720. The 60/40 portfolio had climbed to $26,273, and the 80/20 was at $27,380.”
Hopwood Financial has built your portfolio with volatility in mind with various shock absorbers in the portfolio. That will see you and your portfolio through this turbulence.
As always, we are here to help you and your family answer any questions that might surface. Whatever decisions you’re considering, we’d be honored to support you through them. Reach out to us anytime at 703-787-0008.
Your Hopwood Financial Team