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5 Key Takeaways from the Market Selloff

By: Craig Fehr, CFA March 04, 2020

Stocks have had plenty of pullbacks over the past 10 years, but the velocity of this selloff resembles fear and panic more than economic or financial reality.

So what’s an investor to do? For starters, we don’t think this volatility will subside quickly, as coronavirus uncertainties will linger amid rising new cases and ongoing speculation over consumer reactions. At the same time, economic conditions are not in the freefall that this type of selloff seems to suggest.

Here are five takeaways to help you navigate this terrain.

1. This time is different.

Those are four dangerous words when it comes to investing. But market pullbacks are usually driven by economic weakness, monetary policy headwinds or financial market imbalances.

With the coronavirus, the biological nature of the threat is presenting more questions than answers. No one can predict the spread of this virus, but the market reaction appears to be pricing in a fairly severe scenario including quarantines, school closings, altered work schedules and limited travel that could produce a recession.

On the positive side, a collective evaluation of prior epidemics shows that economic and financial market impacts have historically been fairly short-lived.

2. But this time is certainly not different.

Market selloffs can raise emotions and fear, but they’re common, even in the best of times. Headlines and panic can take the wheel for short spurts, but what shapes the longer-term outcome is the broader path for the economy, corporate profits and interest rates.

The economy and profits will take a noticeable virus-induced dent in early 2020, but as we progress this year, we think these fundamental conditions can resume much of their footing.

3. There is more volatility to come, but perspective provides a positive view.

Volatility can be truly painful if you let it drive you to a short-sighted decision. Perspective is particularly important in periods like this.

  • This is just the fifth-worst pullback in this bull market.
  • Some of the strongest up days tend to occur around big down days. Avoid the temptation to bail on your long-term strategy in hopes of dodging short-term dips.
  • The stock market is still up 8% over the past 12 months and has returned 32% over the last three years.

We suspect the economy can emerge from this without rate cuts, but the market’s expectations versus ultimate Federal Reserve actions represent an additional source of potential volatility in the near term.

4. There’s a solid foundation for an eventual rebound.

It’s not clear that the panic has been exhausted, but we remain confident that a turnaround will eventually materialize. We could see a dramatic slowdown in GDP to start 2020, but the economy entered this situation on firm ground. Ultimately, we think a market rebound can be built on this foundation:

  • U.S. unemployment is near a 50-year low, and wage growth has been solid. Labor market conditions may see temporary disruption, but we think households remain in good shape looking forward.
  • Housing market indicators were on the upswing, and the drop to new lows in mortgage rates could offer further support.
  • Fed policy and interest rates are likely to remain highly supportive for the foreseeable future. Credit markets are not currently signaling the stress that would be consistent with a more sustained economic downturn.

5. Diversification isn’t flashy, but it helps.*

Diversified portfolios have generally benefited in this selloff. Bonds have rallied, delivering solid gains to help offset recent equity market declines. And international equities have outperformed U.S. stocks during this pullback.

We recommend you consider the following to help navigate the path ahead:

  • Don’t lose sight of why you’re investing. It’s tempting to make changes to your strategy under the weight of market declines. But your goals, rather than the headlines, should be guiding your decisions.
  • Re-assess your comfort with risk. Use the recent volatility to gauge your ability to weather short-term swings in your portfolio. An increased allocation to fixed income can help protect the downside in your portfolio but will also impact long-term growth potential.
  • Be opportunistic. We think an eventual look back on this correction will reveal it was a compelling buying opportunity. Talk to your financial advisor about rebalancing strategies and systematic investing that may be appropriate for you to take advantage of volatility in the market.

Important Information:

*Source: Bloomberg.

Past performance of the market is not a guarantee of how it will perform in the future.

Diversification does not ensure a profit or protect against loss in declining markets.

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

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