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Market Meltdown:  The Global Takedown Rolls On

Market Meltdown: The Global Takedown Rolls On

March 17, 2020

19 trading days ago, the S&P 500 was hitting all-time highs as the average was closing in on 3,400 and the media could do nothing but sing the market’s praises.  Today, we closed at 2,386 after losing a staggering 325 points or 12% in one of the worst days in history as COVID-19 continues to terrify investors and an economic recession is pretty much a sure thing at this point.  Down 30% from its high, the market is now squarely in bear market territory, there isn’t a bottom in sight, and investors are scared to death as they keenly tune in to all of the “Markets in Turmoil” news specials tonight.

As markets respond to Coronavirus risks, oil’s precipitous decline, a possible credit crisis in corporate America, and a recession, investor fear is at an utmost extreme level.  In my last message to clients and readers of this post, I mentioned that as of the first week in March, the advisors at Capstone made certain modifications to client portfolios to reduce overall RISK and adjust portfolio composition while we paddle through a sea of instability.  For anyone who is not yet a Capstone client, I continue to offer a free risk-assessment of your investment portfolio because, frankly, risks that remain in the markets at this point are probably NOT fully priced in yet and, even now, it may be appropriate to make adjustments to things we CAN control.  

So, are you ready to give up yet, sell all your stocks, and get out the coffee can?  Well, there’s a lot at stake if you do…Let’s try to break this down again.

According to WHO and the CDC, the actual risk to most people's health in this epidemic is low but, at the moment, markets could care less as they continue in a downward spiral and freefall from greatness in as little as three weeks.  Do we have an ability to layout the odds of an outcome here?  Well, no.  Nobody can predict what will happen next which is the reason why we’re in complete panic mode here and there’s blood in the streets.  But what if, over the course of, say, the next few weeks or months, a solution for this novel disease is created and headlines that the “curve is flattening” replace the threats we’re hearing over and over again today?  In my opinion, things would calm down significantly, markets would rally, and the investor who jumped ship today loses most of her net worth because she “locked-in” losses by panicking out. 

In my last post, I said that it’s too late to “get out” and that selling stocks at current levels is irrational and makes no sense.  Stocks should be sold into strength when emotions are not running high and when anxiety levels aren’t through the roof.  As advisors, we provide education to our clients and we all know that there is undoubtedly a need for investors to learn, but, unfortunately, education doesn’t apply to an investor’s target asset allocation strategy and it doesn’t deal with or provide for the issue of panic.  So, even the most educated investors, when faced with a financial danger will still be panicked and want to throw in the towel.  The human instinct is to “fight or flight” and when you think about it, all we have as investors is “flight” because we don’t really have choice or a mechanism to “fight”.  Also, when educating our clients, we establish a tolerance for risk and an asset allocation strategy…We illustrate how past bear markets have affected the portfolios we recommend and how holding up in any downturn is the plan – we don’t talk about a right time to panic out or make mistakes.  During times like these, though, tolerance for risk evaporates and if you ask someone who is panicked what their risk tolerance is, the answer will be zero as they assume that have a better place to put their money like a bank CD – or how about under the mattress? 

During the “Great Recession” of 2008-2009, we had countless conversations with clients who were panicking and “wanted out!”  We reacted by managing risk though not pulling the rip cord on stocks and indiscriminately selling everything in sight…That worked out well as we entered one of the biggest bull markets in history which was created out of that recession.  Anybody who panicked out of that market made an enormous mistake. 

Investors need to be calm, stop fearing the markets, and be level-headed about what is going on…At Capstone, based on our models, we have made adjustments to portfolios and will continue to invest responsibly within our client accounts.  After today’s massive sell-off and at current market levels, it’s conceivable that we are, albeit very early, in the beginning stages of a bottoming process…That process will take some time and cause more fear, but if you’re managing risk prudently, you can and will get through this downturn and, hey, perhaps even use it to your advantage by buying some of the chaos, not selling it. 

Please contact us with all of your concerns.  We are here to help and can be reached at (570) 587-7800 (office) or 888-587-7526 (Toll Free).

(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)