Market Meltdown

Market Meltdown
3103Market Meltdown

Jeffrey Viksjo CFA

What happened this morning?

 

U.S. stocks fell nearly 7% in early morning trading, the heaviest one-day fall since the financial crisis in 2008.

  • After a brutal last few weeks, the S&P 500 index is now down nearly 18% from its all-time high reached on February 19th.
  • U.S. stocks are very close to entering an official bear market (when stocks drop 20% or more), which would be the first bear market since 2008.
  • As investors rushed into “safer” assets, bonds prices rose and bond yields dropped to all-time lows (the 10-year Treasury yield is now just 0.5%).

 

Why are stocks falling?

 

Markets received a shock on top of a shock.

  • While panic continues over the coronavirus, Saudi Arabia dealt another blow to economic stability by starting an oil price war with Russia over the weekend, causing the price of crude oil to plunge.
  • This has ramifications for energy firms across the globe and could lead to job losses in the energy sector here in the U.S.

 

Are we headed for another 2008?

  • While the virus outbreak will certainly hit the economy in the short-term, this is not the global financial meltdown of 2008 when banks stopped lending and business activity grinded to a halt.
  • Banks are much stronger today than in 2008 and will be able to weather the storm.
  • We are more adaptive to this type of crisis then we were even ten years ago with the advent of remote computing, online commerce, etc.

 

How are we responding?

Days like today are why we have high quality bonds in your portfolio; Bonds are up over 6% year-to-date.

  • We continued to resist the temptation to stretch for yield and buy lower quality bonds; that strategy is paying off for your portfolio now.

 

We are not going to follow the crowd and sell stocks when there is little support from buyers.

  • We are interested in using the market rather than being used by the market.
  • We distributed RMDs to clients at the beginning of the year (selling near the all-time highs for the market).
  • Dividend reinvestment has been turned off for accounts with draws (meaning we won’t have to raise as much to fund draws).
  • For those with draws where the dividends are not enough, we will be selling bonds, not stocks.

 

We re-balanced portfolios in December (selling stocks, buying bonds) which has somewhat diminished the losses you are experiencing now. We may rebalance portfolios again in the near future if we believe the market has bottomed (this time selling bonds, buying stocks), which could increase your gains when the market eventually recovers.

  • The point is to stay disciplined and buy low, sell high.

 

Please don’t hesitate to contact us if you have any questions. We’re always happy to discuss further!