The volatility we are currently seeing in the market is historic and unprecedented. The speed at which this decline happened is one of the fastest on record.
“Violent” is the word Moneta CIO Bill Hornbarger used to describe these market swings in his latest video update. He then outlined three separate and distinct factors for investors to think about when assessing the current market conditions: health, the economy and the markets.
For health concerns, Hornbarger echoed what health officials at the CDC and WHO are saying in terms of social distancing and safety measures.
From an economic perspective, it is important to remember that the economy was in good shape coming into this. Unemployment was low, consumer and business balance sheets were strong, and the economy was expanding.
This downturn in the markets happened so fast that we haven’t seen much real time data. Two pieces from early March were the University of Michigan Consumer Sentiment and the regional manufacturing data from the Empire District (the NY Fed area). Both showed a significant slowdown in the first half of this month.
It won’t be surprising if, several months from now, a recession is dated as having started March 1.
Markets are discounting machines, always looking ahead. The markets have rapidly repriced to a bad case scenario. Remember, we were at a record-high basis the S&P 500 in February. Now it’s down roughly 30% in less than a month. Bear markets happen and this one, while faster than most, isn’t that unusual or the most severe. We have had 12 since WWII with an average duration of 14 months and the average time to recover to new highs about 2 years.
The most recent bear market in 2007-2009 declined 57% and took 4 years to recover. But in each previous case, investors said, “This time it’s different,” and each time it did recover.
The 2007-2009 Global Financial Crisis (GFC) provides officials a good playbook on what to do and they are following it. In that period, they were often addressing things on the fly and had to get approval on all actions, which significantly slowed things down. Many people forget that TARP (Troubled Asset Relief program) failed in Congress the first time. This time, those procedures are already in place and the Fed and Treasury have responded both quickly and aggressively. They have already lowered rates to 0%, started a quantitative easing program and stepped in to ensure the commercial paper market (a short-term type of fixed-income security, common in many money market mutual funds) keeps functioning – all in very short order. These processes took weeks and sometimes months during the GFC.
What should investors do now?
“I would tell you emphatically that the worst thing to do right now is panic,” Hornbarger said. “People who make emotional decisions in the moment – typically it turns out to be the wrong decision.”
While we don’t have any control over the markets or the economy, Hornbarger reminded viewers that we do have control over our saving and spending. He also offered several practical steps investors can take when addressing their portfolios in this market environment:
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