In today’s Steady Investor, we look at what is going on in the markets and our key takeaways and questions for investors to consider, such as:
Equity Market Volatility Persists, and is Likely to Continue – During times like these, sometimes the best course of action is to watch as little news as possible and completely refrain from checking your portfolio value, in our view. The goal of taking these two actions is simple: remove emotion from the decision-making process and stay focused on the long term. The last few trading days offer a case in point: coming off a horrendous final week of February, the S&P 500 took another nosedive (-2.8%) on Tuesday even as the Federal Reserve cut interest rates by half a percentage point. The following day, however, the S&P 500 rallied by +4.22%, which many news outlets credited to Joe Biden’s surge in Super Tuesday voting.1 In our view, there is no real way to attribute the S&P 500’s losses or gains to single events or data points. During market corrections, the S&P 500’s changes are impossible to predict – what happens one day often has no bearing on what happens the next. Investors who try to time their exits and entries in the market during a correction are almost sure to make big mistakes, in our view. Often times, the best days in the market follow the worst days, so getting in-and-out leaves wide open the possibility of selling into a rally or buying right before another downdraft. With equity market volatility likely to persist, we think it’s better to keep a cool head and ignore the noise.
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Don’t Let Fear Drive Your Investments!
In any given year, a steady stream of troubling news, like the coronavirus, can make it seem like the stock market is doomed. But examining history shows that the stock market has thicker skin than most investors do. Our Guide, “Feeling Bearish? This is How Stocks Deal with Uncertainty” looks at how the market reacted to historical events.
If you have $500,000 or more to invest, click on the link below to get your copy today and see just how resilient the market can be.
Feeling Bearish? This is How Stocks Deal with Uncertainty2
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Rate Cuts Probably Less Effective than Fiscal Spending and Time – We believe most economic weakness that results from the coronavirus will come from a supply shock – production delays, supply chain issues, trade bottlenecks. These are all issues we think can be amended quickly, once the crisis abates and the affected countries resume business as usual. That’s also why we think interest rate cuts are far less effective than fiscal stimulus and, simply put, time. A 0.5% rate cut won’t help to restart a factory or stimulate global trade. But a few months of time can, in our view. Fiscal stimulus can also be effective during crises like these, for two reasons: it sends a signal to markets that governments are willing to spend to address the crisis, and it helps to make up for the shortfall in consumer spending that is likely to occur as people stay home and change their normal habits. Though many news outlets pointed to Joe Biden’s Super Tuesday wins as fuel for Wednesday’s market rally, a different take might assert that stocks were responding to the $8 billion spending bill that quietly passed in the House.3
The Federal Reserve Changes Rules for Big Banks (In a Good Way) – In a much-anticipated revision of the 2010 Dodd-Frank rules, the Federal Reserve voted almost unanimously to restructure the ‘capital requirement’ rules for the biggest US banks, like JP Morgan, Citigroup, and Bank of America. There was a good argument, in our view, that the Dodd-Frank set of bank regulations had noble intentions but flawed structure and enforcement. Lawmakers struggled for years to clarify the complex set of rules, while banks operated with a high degree of uncertainty over what the playing field would ultimately look like. This most recent Fed overhaul simplifies the “post-crisis capital framework for banks,” with new rules that essentially streamline stress tests and reduce the number of capital requirements down to 8 (from 13).4
Remember Economic Fundamentals in the Backdrop – Before the coronavirus absorbed global headlines, the US economy was looking steady and reasonably strong. Housing and construction spending were trending nicely; hiring remained robust and wages were ticking higher; the stock market was hitting new all-time highs; the US and China had made positive moves towards easing the trade war; and consumer spending was reflecting the strong labor market. In all, the US economy was positioned to grow in the middling but still nicely positive 2.5% range, with corporate earnings poised to make a comeback off a weak 2019.5 The coronavirus will almost certainly require downward adjustments to earnings and growth forecasts, but we believe the conditions that existed before the virus outbreak can exist after it, too.
While the coronavirus has most investors worrying, it is important to remember that the market has dealt with similar events in the past. So, before you “jump ship” on stocks, take a moment and to look at history for perspective.
In any given year, a steady stream of troubling news can make it seem like the stock market is doomed. But examining history shows that the stock market has thicker skin than most investors do. Our guide, “Feeling Bearish? This is How Stocks Deal with Uncertainty”6 looks at how the market reacted to historical events.
If you have $500,000 or more to invest, click on the link below to get your copy today and see just how resilient the market can be.
Disclosure