Stocks dropped on Wednesday as weak economic data—including retail sales and the New York Federal Reserve’s Empire State business conditions index—came in at record lows, reviving investors’ fears of COVID-19’s impact. In addition, a number of large banks reported poor earnings.
The S&P 500® Index declined 2.2% on Wednesday, and is down nearly 18% from its peak in February.
“Stocks are unlikely to experience a sustained rebound until the pace of new COVID-19 cases begins to slow and there are notable steps toward developing a vaccine,” says Schwab Chief Investment Strategist Liz Ann Sonders.
Some countries that experienced the novel coronavirus earlier than the United States are beginning to reopen their economies, and investors are watching closely to see how those re-openings progress.
“It will be weeks before we know how the re-openings are going in Austria, Denmark, and Norway, which are beginning this week,” says Schwab Chief Global Investment Strategist Jeffrey Kleintop. “China’s recovery has been V-shaped so far, but it may not be representative or sustainable.”
Short-term Treasury yields are likely to remain low as investors seek safety and liquidity, says Kathy Jones, Chief Fixed Income Strategist for the Schwab Center for Financial Research.
The Federal Reserve has taken unprecedented action in recent weeks to support the economy and provide liquidity to financial markets, which has helped to stabilize fixed income markets, Kathy says.
“Fiscal and monetary policy are providing support for most bond markets—particularly investment-grade corporate bonds and short-term municipal bonds,” Kathy says. “The Fed’s purchases of corporate bonds has helped bring yields down from peak levels and opened the door to new issuance. Direct grants to states along with Fed’s purchases are positive for the municipal bond market—although there is a good chance more will need to be done.”
What investors can do
As deep as the global downturn has been, it may also be short, Jeffrey says.
“A steep decline is difficult, but a decline of almost any amount can be handled by a long-term investor if it doesn’t last for a long period of time,” Jeffrey says. “The 2000-2002 and 2007-2009 bear markets were lengthy in addition to being deep.”
Meanwhile, there are a few steps that all investors can consider during market volatility:
1. Resist the urge to sell based solely on recent market movements. Selling stocks when markets drop can make temporary losses permanent. Staying the course, while difficult emotionally, may be healthier for your portfolio. However, if you do need to sell, there are steps you can take to minimize the negative impact on your portfolio, including rebalancing and tax-loss harvesting.
2. Revisit your risk tolerance and risk capacity. If recent volatility has made you extremely uncomfortable or if you will need money from your portfolio soon, make sure the amount invested in riskier assets—such as stocks—isn’t too high. This is especially important for investors who are or soon will be spending from their portfolios, such as retirees or people who are near retirement.
3. Make sure your portfolio is appropriately diversified. Market volatility underscores the importance of having a portfolio that contains a variety of asset classes, including stocks and bonds, balanced in a way that reflects your risk tolerance and investment timeline.
4. Rebalance your portfolio as needed. Market changes can skew your allocation from its original target—over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling some of your outperformers and moving the proceeds to positions that have become underweight. It’s a good idea to rebalance your portfolio periodically to bring it back to your original asset allocation targets (Schwab clients can log in to their accounts and use the Schwab Portfolio Checkup tool to help with this).
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.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
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.
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.
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.
Tax-exempt bonds are not necessarily suitable for all investors. Information related to a security's tax-exempt status (federal and in-state) is obtained from third parties, and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the alternative minimum tax. Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
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