Since our fourth quarter market commentary, a “black swan” has emerged, negatively altering the trajectory of the financial markets and the outlook for global economies. Wikipedia defines a black swan as “an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.” On March 11th, the World Health Organization (WHO) declared the outbreak of the new coronavirus (COVID-19) a pandemic. With the first case reported in the Chinese city of Wuhan in December 2019, COVID-19 has now spread to over 114 countries and territories. More than 3,487 people have become infected with the virus in the United States in 49 States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. There have been 167,511 cases reported across the globe.
As of this publication, Italy has closed all shops, except grocery stores and pharmacies. Currently, Italy has over 24,000 confirmed cases. Notably, these numbers are continuing to accelerate. Currently in the United States, the Center for Disease Control and Prevention (CDC) is recommending social gathering changes, like avoiding crowds, cruise travel, and all non-essential air travel. In the past few days, sporting events have been canceled and universities/schools are closing across the country. More recently, many public school systems, including the largest system in the nation, New York City, have closed, along with restaurants and bars across the country. Today, 7.1 million Americans in the San Francisco, California area are faced with a “shelter in place” order until April 7, as the city attempts to contain the outbreak.
Our hope is that you and your families remain safe from this virus. Not only is this pandemic a social and healthcare issue, it has quickly become a financial issue. In less than three weeks from the peak of the stock market, stocks have entered a bear market, meaning stocks have fallen over 30% from their peak in mid-February. This decline is historically the quickest time stocks have fallen over 30% from their peak.
Therefore, financial markets have quickly priced in a lot of negative news. To add to the uncertainty, on March 11th, OPEC and Russia disagreed over oil production cuts, leading Russia to initiate a price war in the oil markets. A plunge in oil prices contributed to concerns about U.S. shale producers and their ability to pay back debt if prices continue to fall. All of this means economic activity will dramatically slow over the next few months.
These issues have led to uncertainty and panic in the financial markets over the past four weeks.
However, for long-term investors, valuations have become much more attractive for stocks. In order to gain more confidence in a market recovery, we are looking for strong monetary policy from the Federal Reserve, strong fiscal policy from Congress and the White House, expanded testing for COVID-19, and a peaking of the COVID-19 cases. In the meantime, we believe it remains important to be disciplined with your asset allocation and diversification in order to properly balance your risk and return objectives.
While it may be tempting to cash out of the market until these events pass, although past performance does not guarantee future results, history has demonstrated stock markets eventually recover. In other words, as difficult as it may be, staying invested through all types of markets have contributed to better long-term returns. However, it remains important to maintain adequate cash reserves for future spending needs. If you should have any questions about your investments, please call us in order to discuss strategies to meet your needs.
Your Advisors at 9258 Wealth Management