Perspective’s going be tough here. Today, after losing a staggering 2,013 points or 7.8%, the Dow Jones Industrial Average, along with all major market indices, entered into bear market territory in one of the worst days the stock market has seen in history. The combination of Coronavirus fears, oil price wars, and plummeting interest rates have created what now appears to be the beginning (not the end) of a very vicious cycle in stocks for, at least, the foreseeable future.
I would like to point out that I have been warning clients and investors over the last year or so, that caution in the stock market should be observed and, that it was wise to use the gigantic moves that the stock market had made to adjust risk levels in investment portfolios. In fact, if you retrace many of those messages, you will see that the advisors at Capstone were booking profits and rebalancing client portfolios as new, relative highs were being reached almost daily. Now naturally, I was not predicting any of what’s going on today, but was simply acting on our concerns that the markets looked stretched and that the record rally in stocks was probably long in the tooth.
Okay. Deep breath. Where do we possibly go from here? Well, let’s dig through the turmoil and try for just a tiny, little moment to put perspective on what’s happening and what the risks are:
- Coronavirus: The risk of global pandemic is rising and consumers around the world are becoming hermits as they are working from home, avoiding travel and crowds, and stockpiling bathroom tissue as they brace for all-out Armageddon and economic recession. Is Armageddon and recession possible? Armageddon? I think not. Recession on the other hand? Unfortunately, there’s a very good chance. Many experts expect Coronavirus infections to spike around the globe as more tests are being made available, more people interact with others who may not have signs of the virus but are spreading it, and reality that the virus spreads easily sets in.
- Oil: Out of absolutely nowhere and on the worse day since 1991, oil prices tanked 24% today on the heels of a price war between Saudi Arabia and Russia and the energy sector got decimated with oil giants Exxon Mobil and Chevron falling 12.22% and 15.37% respectively. In a tweet, President Trump stated that the price war will ultimately be good for consumers but, with the United States now being the world’s largest producer and an exporter of oil, investors disagreed because as prices stay low and continue to decline, profits and earnings for many producers will wane and some will even default on their debt potentially putting their entire businesses at risk. Ultimately, this shock to the economic system could lead to wage declines and even a huge rash of layoffs in our country.
- Rates: Interest rates plunged today as the flagship ten-year treasury bond yield went as low as 0.31%, pushing US Treasury Bond prices into unchartered territory. The bond market is petrified as it is now pricing in a 90% chance of global recession, signaling the chance of another debt crisis beginning in the oil patch, and if credit deterioration spreads into other debt instruments, we could be looking at a lethal mix of a global corporate debt bubble colliding with a once-in-a-century biological epidemic. Once again, the four-letter word is “debt” and it’s front and center.
Okay. Deep Breath. So, what do investors do with all of this? First, we should recognize that there have been only 20 days like today since 1929 where the market has dropped by 7% or more – these types of events don’t occur often and when they do, it can shake even those investors with iron stomachs out of the stock market. Behavioral finance tells us that we hate losing money twice as much as we love making it and, given that we are human beings that make emotionally-driven decisions, our intellect and psyches can be our own enemies that have the ability render us completely powerless over our decision making process. We will, unless we’re disciplined, do exactly the wrong thing at exactly the wrong time.
It is important and crucial to long-term success to stay levelheaded and be realistic with near-term expectations. Stock market declines happen. Recessions happen. It’s just part of investing and the world we live in. Nobody knows when this mess will end and what will really occur in the coming weeks and months in our markets and in our economy but there are reasons to be bullish over the long-term. Stocks, at this point, have to go through a process in order to settle down and eventually resume their long-term upward trend. It’s a process that takes time and undoubtedly will be painful to get through, but if you (like Capstone has) have reduced risk in your portfolio, you can and will get through it.
The great investment legend, Warren Buffet, once said, "You can't produce a baby in one month by getting nine women pregnant”…In other words, some things just take time and are a process that you have to get through to achieve success.
As a client of Capstone Wealth Management Group, you know that we’re here to answer your questions and address all of your concerns. Please call us at (570) 587-7800 (Office) or 888-587-7526 (Toll Free) anytime. If you’re not yet a client and are worried about the risk in your portfolio, contact us for a complimentary risk review. As always, we can help!
(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.)