U.S. stocks fell on Wednesday, with the Dow Jones Industrial Average closing in bear market territory, down 20.3% from its recent peak in February. The S&P® 500 Index was down 19% from its February peak.
The number of COVID-19 cases has continued to rise, prompting the World Health Organization (WHO) to label it a “pandemic.” Meanwhile, Saudi Arabia—which on Monday cut its official crude selling price—on Wednesday unveiled plans to boost its oil-production capacity. The price for Brent crude oil, the global benchmark, has fallen from about $59 a barrel on February 20th to about $36 a barrel on Wednesday.
“The number of COVID-19 infections and deaths has continued to rise, prompting increasingly drastic containment measures,” says Schwab Chief Investment Strategist Liz Ann Sonders. “Signs that companies in the hardest-hit industries, including energy- and travel-related companies, were drawing down credit lines to battle the effects of the virus on their operations added to the anxiety.”
Recession risk is rising
The fall in oil prices will have mixed effects, according to Schwab Chief Global Investment Strategist Jeffrey Kleintop.
“Importers such as China, Japan and India will be beneficiaries, but countries such as Canada and Mexico will be hurt,” Jeffrey says. “Earnings estimates for energy companies and the global averages—as well as jobs—will likely need to be cut, despite the benefit at the pump to consumers.”
Altogether, recession risk is on the rise, Jeffrey says. “It’s possible we are entering a global recession, but it’s too early to tell the magnitude,” he says.
Much will depend on the severity of new-case growth around the world, Jeffrey says. “In past epidemics, stocks didn’t bottom until global new-case growth stabilized,” he says. “While new cases outside China continue to rise, Chinese stocks have outperformed as domestic new-case coronavirus growth seems to have peaked.”
The federal funds rate may be headed to zero
Despite the Federal Reserve’s emergency 50-basis-point short-term interest rate cut on March 3rd, the fed funds futures market is pricing in another cut at the Fed’s March 17-18 meeting of 50 basis points (or a half percentage point; a basis point is one hundredth of one percent, or 0.01%), according to Kathy Jones, Chief Fixed Income Strategist for the Schwab Center for Financial Research.
“We would expect the Fed to take more steps to keep the financial markets functioning, such as increasing the level of short-term Treasury bills it holds for repo operations, encouraging foreign banks to use swap lines to make sure there are enough dollars in the system, and possibly re-starting its quantitative easing program,” Kathy says. “The likelihood of U.S. growth falling to zero, or even falling into a recession, has increased, and the Fed has demonstrated that it will be aggressive to try to support the economy.”
With yields already so low, investors often ask if there’s any point to holding bonds, Kathy says; the answer is yes.
“Historically, there has been no better hedge against an equity market decline than long-term Treasury bonds,” Kathy says. “We continue to believe that most investors should have an allocation, however modest, to high-quality bonds of intermediate or longer duration. It can mean the difference between being able to meet your current obligations, including paying taxes, and having to liquidate stocks when the market is plummeting.”
Where do we go from here?
The spread of COVID-19 is an unusual event, making the market’s direction especially difficult to estimate.
“It is difficult to forecast how long it will be before the virus fades either of its own accord or due to the effectiveness of the countermeasures being employed against it,” says Mark Riepe, head of the Schwab Center for Financial Research. “It is also difficult to judge the response of the economic levers after it comes under control. Will economic behavior snap back to pre-crisis levels relatively quickly, or will there be a slow, gradual recovery? Over the next few weeks we’ll be watching for clues as to which outcomes are most probable. The most likely outcome is that the pace of recovery will be uneven across countries as well as sectors of the economies.”
What to do now
There is no one-size-fits-all answer for how to respond to an event such as coronavirus. “The best approach is to take the world as it is and match it to your situation,” Mark says.
For instance, if you’re relying on your portfolio to fund your lifestyle right now and need to sell, know that there are steps you can take to minimize the negative impact of selling in a down market, including rebalancing and tax-loss harvesting.
If you’re a younger investor who is saving and investing for a distant goal, then this market turbulence is not terribly important. Market drops are an unavoidable feature of investing. What matters is how you respond—or, more to the point, don’t respond. Sometimes the best action to take is no action at all. If you’ve built a portfolio that matches your time horizon and risk tolerance, and you don’t expect to need money from it anytime soon, it’s usually best to stick to the investing plan you developed when markets were calm.
If you’re near retirement then having a financial plan is more important than ever. At this stage of life it is vital to understand how much risk you can stomach, both emotionally and financially, in any market environment.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
Investing involves risk including loss of principal.
Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.
Diversification, asset allocation and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
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