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GUEST BLOG / By Craig Fehr. Analyst,
Edward Jones--Oil prices dropped more than 20%
Monday (March 9) following a breakdown in OPEC production talks over the
weekend, adding to the coronavirus anxiety in the markets. Equities are down
sharply Monday, extending the pullback that began in mid-February, with the
rush into lower-risk investments (Treasury bonds, gold) pushing interest rates
to all-time lows.
Oil prices and virus containment measures
pose credible headwinds that will impact near-term growth, but in our view,
markets are trading much more on fear and emotion (as they tend to do
periodically), which raises the importance for investors to take a more
rational, disciplined approach.
Markets may feel like a roller coaster:
The ups and downs are likely to continue as the situation evolves. But history
and experience have shown us that tightening your seatbelt and keeping your eye
on the horizon are generally more effective than trying to exit mid-ride. Here
a few points to consider about the latest market moves:
1. Big moves are producing big moves.
The latest wrinkle in the stock market
correction has come from the oil market, with crude prices experiencing their
largest daily drop in nearly 30 years. With Russia failing to agree to proposed
OPEC production cuts (reducing supply to support prices), Saudi Arabia
announced retaliatory price cuts and production increases, which pose
significant challenges for other global producers, including the U.S.
Monday’s historic drop in oil prices
threatens investment, employment and financial stability in the energy
industry, which is adding to the virus-related uncertainties for the economy.
This is further weighing on stock prices, with the S&P 500 off more than
17% from the mid-February highs.1 In turn, stock market worries are prompting
significant demand for lower-risk Treasury bonds, pushing the 10-year rate to
an all-time low below 0.40%. The sight of 10-year yields at these levels is
adding to the feedback loop of higher volatility driving lower stock prices,
which drives lower rates, which then drives higher volatility.
Investors can take comfort in the fact
that:
a) These types of episodes don’t as a rule
last indefinitely, and
b) The fundamental underpinnings of the
economy are not declining in a manner or rate that stock price and interest
rate movements seem to suggest.
2. There are two sides to this story.
We think the economy will take a
meaningful hit in the near term. Efforts to contain the spread of the
coronavirus – such as adjusted work schedules, school closings, delayed
business investments and altered consumer spending habits – are likely to
produce a temporary contraction in GDP. Given the increased role of energy
production within the U.S. economy in recent years, the news of a budding oil
price war will add to the near-term headwinds as investment and employment in
the energy industry are impacted.
However, some of these factors have beneficial
effects as well. First, the economy entered this situation with a clean bill of
health. Labor market conditions were the best in decades, housing activity was
on the rise, and financial conditions for consumers and businesses were
favorable. The recent plunge in interest rates has positive implications for
consumer and business financing costs as well as housing conditions. Refinance
activity has surged, which will help put more money in consumers’ pockets.
The drop in oil prices offers another boost
to consumers’ disposable income via lower prices at pump, as well as lowering
some input costs that can help keep inflation low. To that end, the Federal
Reserve has responded with rate cuts and is likely to lower rates even further
from here. While none of these will halt the virus impacts in the coming weeks,
we believe they do set the stage for the economy to rebound smartly as the
temporary effects of the coronavirus ultimately pass.
3. We’ve been here before.
This pullback shouldn’t be dismissed, but
times like these require perspective:
The stock market was here as recently as
the beginning of 2019, and this is the fourth pullback of more than 15% over
the past decade. Market corrections always feel unsettling, but recognizing
they are a normal part of long-term investing can help with rational decisions
amid irrational market moves.
This volatility may feel like 2008-2009;
however, conditions are notably different today. The uncertainty is playing out
in real time in the markets, but economic conditions won’t move as fast or as
severely, in our view.
Oil prices fell 76% (as low as $26) from
2014 to 2016. This decline was a catalyst for a stock market correction but was
followed by a strong rebound over the next few years. Oil prices also fell more
than 50% in 1990-1991. The stock market fell into correction as well but began
its rebound well before oil prices bottomed.
In our view, diversification and a
long-term approach show their greatest value in times like these. Balanced
portfolios are not mirroring the daily swings in the stock market. While the
headlines and the market seem to be changing rapidly, your financial goals
likely aren’t. Ensure your goals are the guide as you make decisions. Times of
fear and volatility in the markets have historically presented opportunities
for investors who leverage the advantage of time and a longer-term perspective.
Important Information:
1 As of Monday morning, March 9.
2 Past performance is not an indication
of what will happen in the future.
3 Diversification does not ensure a
profit or protect against a loss in declining markets.
Craig Fehr, CFA is a market analyst with Edward Jones, the
broker of record with the ownership PillartoPost.org. Reposted with permission.
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