In today’s Steady Investor, we look at key factors that we believe are currently impacting market volatility and what could be next for the markets such as:
The Likelihood of Recession Rises – What started as a supply shock from disrupted supply chains in China has now fed into a global demand shock as the world economy hits the ‘pause’ button on growth, spending, and investment. Restrictions on travel, going into work, and activities in public spaces have put the economy on virtual lockdown, and the downstream effect of sharply lower spending is likely to soon result in job losses – particularly in the airline and hospitality industry. Many readers may wonder: if we are near certain a recession is imminent (if not already underway), then why not sell stocks and wait for the situation to improve? The answer is that bull markets almost always start when the economic situation looks most dire. In March 2009, job losses were rising, bankruptcies were continuing apace, and corporate earnings were in the gutter. But that’s when the new bull market started – even though the recession didn’t end until July 2009.1 It is impossible to say when the virus will come under control and when consumers will return to normal behavior, but it does seem clear that stocks will make their move well before any of that happens.
____________________________________________________________________________
Handling Volatility – What You Should Do!
Sudden market declines often result in emotional decision-making. For example, many investors rationalize that selling out of stocks is the surest way to avoid incurring further losses, but selling in many cases just locks those losses in.
The real challenge is not in finding a way to eliminate volatility—it is developing a mental approach to dealing with it. Our guide, “Helping You Manage Market Volatility,” will provide you with insights and tips to do just that. Get answers to questions like:
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Download Zacks Volatility Guide, “Helping You Manage Market Volatility.”2
____________________________________________________________________________
The Federal Reserve Responds – Last weekend, the Federal Reserve made an unprecedented second emergency rate cut over just a two-week period, bringing the benchmark rate to near zero. Quantitative easing is also back on, with the Fed pledging to buy $700 in Treasury and mortgage-backed securities as a means to keep long rates down and provide liquidity into capital markets. But they didn’t stop there – the Fed also said it would launch the “Primary Dealer Credit Facility,” which would give the 24 biggest banks access to short-term loans at very favorable rates.3 Banks were well-capitalized going into the crisis, but with this facility it seems to us that the notion of a credit or financial crisis has low likelihood – at least for now. While Fed stimulus cannot facilitate a return of demand to the economy and stabilization of global supply chains, it can at least ensure that there is ample liquidity in the market until that normalization happens.
The Federal Government Aims the Stimulus Cannon – The federal government is inching towards what could ultimately be a $1 trillion stimulus package to support Americans during this crisis. The Trump administration proposed two rounds of direct payments to US households totaling $500 billion, which may look something like getting a $1,000 check or deposit.4 The amount of the check – if the stimulus happens – would depend on the family size and income. The Senate is also looking at proposals to provide aid to airlines – which have been tapping credit lines and taking in loans – and to provide paid sick leave for those who need to miss work.
Don’t Expect Market Volatility to Let Up Anytime Soon – It appears that we are still in the early innings of winning the battle against Covid-19, and the stock market is likely to remain on edge as good and bad – but mostly bad – news floods the airwaves. Investors should remember two things in the coming weeks and months: 1) big market rallies often happen very closely – if not the day after – big selloffs. In other words, volatility works both ways; and, 2) the market has a long track record of staging its comeback well before the news gets better and the situation improves. Throughout history, new bull markets have started when the economy feels like it is in complete meltdown, so remember that bad news does not necessarily signal that the market is heading for another big down draft. Bull markets often start when people least expect it.
While
there are still many unknowns surrounding Covid-19, it is important to remember
that volatility is a normal part of the ebb and flow of the markets. In times
like this, the key is not to let fear drive your investment decision, but
instead develop a mental approach to dealing with market volatility.
Our Volatility guide, “Helping You Manage Market
Volatility,”5 will provide you with insights and tips to do
just that. Get answers to questions like:
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Disclosure