Market Pulse - 10 March 2020

Monday was a historic day for US equities as major indices posted their biggest drop since the global 2008 financial crisis and the largest single-day point drop for the Dow Jones Industrial Average ever (-2,013 points or -7.79%). The S&P 500 plunged 7.6% and the Nasdaq dropped 7.3%.

There have been a lot of firsts during the Coronavirus fueled volatility in 2020, which was only exacerbated over the weekend as an oil price war has been initiated between Saudi Arabia and Russia, driving the price of Brent Crude to $34.36 per barrel, down 24% for the day, the worst day since 1991. 

The 10-year and 30-year US Treasurys fell below 0.50% and 1.00% respectively for the first time ever.

The Federal Reserve stepped in last week and with an emergency rate cut reflecting fears the Coronavirus epidemic could raise recession risks for the US and global economies. The Fed lowered interest rates in the US by 0.50%, the largest cut since the 2008 financial crisis. The equity markets are also pricing in further rate cuts of up to an additional 0.50% at the Fed’s March meeting, or possibly even cutting rates to 0.00%.

Bank and energy stocks were hit the hardest on Monday’s sell off after a collapse in oil prices sparked fears that financial institutions, already struggling with falling interest rates, could be in for more trouble as some companies in the energy sector may have difficulty paying their loan obligations.

The sell-off has reversed Tuesday morning after a press conference by President Trump, where he pledged to implement “major” fiscal stimulus to stimulate growth in the US economy and to minimize a downturn in GDP. The markets applauded this action and the details of these policies are set to be announced this evening. Oil prices have also rebounded with Brent Crude up 8.22% to $33.69, however far from the key profitability ranges of $40-$45 per barrel that many oil companies need to survive. Any prolonged period of sub $40-$45 Brent Crude will be troublesome for the industry.

However, with panic in the markets and behavior not seen since the 2008 financial crisis, there comes opportunity. As Warren Buffett has famously said, “Be fearful when others are greedy and greedy when others are fearful.” 

Many of the fears in the market are most likely overblown. The common flu virus on average kills 27,000 to 70,000 Americans per year. Economies are not shut down and life goes on. The Coronavirus has killed 22 Americans to date. That is not to say that we should not be cautious and prepared for the worst, but to think that this virus will send the global economy into a deep recession is probably unrealistic. 

In our opinion, these levels in equity markets present some buying opportunities. Investors that have excess cash on hand and with a long-term investment horizon (5-10+ years) should be looking to slowly take advantage of these dips in the market. In volatile times, it is important to never jump in the markets all at once and not “catch a falling knife”. Investors should invest small portions of cash (10%-25% of excess cash at a time) to allow for further dips in the markets and lower entry levels.

Predicting when the best time to enter or exit the market is extremely difficult.  Most retail investors, and even professionals, get this timing wrong.  High frequency trading and algorithms have made it next to impossible for investors to match the speed at which markets react to news and other factors that result in volatility. Investors must keep their long-term goals in mind, have sufficient emergency funds in place (6 months of expenses), and most importantly, stay the course.

It is perfectly normal to feel uneasy about market pullbacks resulting in a lower portfolio value in the short term. It is important not to react to these pullbacks and to keep in mind that volatility is common and to be expected.  When investors try to time their entry and exit, they may actually get stuck selling out at a bottom and miss this bounce back into positive territory. The following chart illustrates a portfolio of $10,000 invested in the S&P 500 in 1970 and what the return would look like if a stretch of the “best” days were missed through August 31, 2019. In the long run, discipline breeds success.