As we enter a new week, it appears volatility in the market is here to stay. The market continues to have big swings both up and down at levels that we have never seen before. Algorithmic (computer driven trading) certainly is a big component of that, where buy/sell triggers are in place that initiate trades when markets or volatility reach a certain level. Another component adding to the large market fluctuations are the rise of exchange traded funds which allows investors to quickly enter or exit the markets. Knowing that these swings will likely continue, it is important not to get too focused on the day to day fluctuations. This isn’t as easy as it sounds with every news station broadcasting the doom and gloom of the coronavirus. Let’s remember that those companies increase profits by viewership so there is good reason to make stories more exciting.
How is the coronavirus impacting the economy? The US economy entered this epidemic at a very healthy starting point, with unemployment and the consumer very strong, a characteristic than will make us more resilient than our global counterparts. The United States has taken a very preventative policy on the virus, cutting travel with China early on, recently cutting flights to Europe, and limiting large gatherings. Businesses are having people work from home with industries that can do so. Some other businesses are limiting hours or suspending operations all together. It is certainly positive that we are a very web-based society which will help contribute to overall GDP. All the preventative measures taken will likely lead to a decline in economic output, however, should also reduce the spread of the virus and allow the economy to get back to normal operations sooner. The Federal Reserve announced that it will reduce the fed funds rates to near zero, a move that I have previously stated won’t have material impact on the economy. I continue to believe that fiscal policy will be much more effective than monetary policy. Congress is currently in the process of coming up with an expansionary policy which should be disclosed in the next few weeks. Fiscal policy should give some relief to the stock market in the short term and allow us to have a sharp rebound in the economy in the second half of the year.
Our managed accounts have remained resilient compared to the declines in the market, due to the increase in bond exposure over the past few quarters. At the end of last week, we reduced/eliminated exposure to a few of the more vulnerable areas of your portfolio to lower future volatility and downside. Typically, when we have an event driven correction in the market like this one, there tends to be a much quicker recovery than a drop caused by fundamental issues in the economy. When we get some stability and further clarity of the impact of the coronavirus, we will begin to reallocate to equities to take advantage of the downturn.
For additional safety measures we are putting a hold on face to face meetings with our clients. We will still be fully operational and be conducting both phone and video meetings. If you have any concerns about your portfolio or the economy please give our office a call, we are happy to discuss it with you.
Michael E. Kutch, CFA
The views expressed are not necessarily the opinion of LPL Financial. Due to volatility within the markets mentioned, opinions are subject to change without notice. All investing involves risk including the potential loss of principal. No investment strategy including buy and hold and diversification can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary and therefore should only be relied upon when coordinated with individual professional advice. This information is not to be taken as Investment advice or guarantee of future results.
Coronavirus Economic Impact Part Two
March 17, 2020