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Monthly Insights | 2020.03

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Market Recap

Coronavirus + Oil + Fed + Super Tuesday = Market Volatility.

That’s as short of a summary as we can make, but let’s look at a couple things, starting with the Fed and Super Tuesday.

As expected after the first big market drop, the Fed eased interest rates by 1/2 % – a big reduction that came in direct reaction to the market. That same day, the market fell almost 800 points. Not very reassuring. Then, a mere day later, the market rose a a whopping 1,172 points – an all time record. The following Monday, the market dropped another 2,000 points – the biggest point drop on record. That’s 3 records in less than 2 weeks.

What caused the turnaround? All indicators suggest that Joe Biden winning big in Democratic primaries, and Bloomberg dropping out will coalesce the party around a more moderate candidate than Bernie Sanders. Stock markets like moderation, and they bought in droves across the board to show their reaction.

In the meantime, the coronavirus continues to spread across the world and take more of our attention. The latest outbreak in Italy and Iran shocked many, and caused toilet paper shortages. (Don’t ask us to explain that – we can’t figure it out either.) The increase in the cases in Italy, S. Korea, and the US caused a near panic in the market as companies become increasingly more exposed to the effects of the virus.

Finally, the Russians and the Saudis decided to pick a pricing fight over oil. It looks like the Russians were well prepared for this move, and will be able to outlast the Saudis in this price war. In some good news, the Manufacturing ISM survey showed continued growth despite all the bad news. 

Market Outlook

The coronavirus will still lead the market, with the panic being worse than the damage actually caused by the virus itself. Panic is a funny thing in that nobody expects it, and when it happens, it happens fast. Whispers lead to rumors, and rumors lead to panic, and suddenly everyone loses a bunch of money. The Fed’s free money can’t fight the fear of getting sick. That lesson is important and may yet go unheeded.

The thing we focus on here is that the coronavirus is not going away. It will continue to spread, with results that will look like a worse version of the flu. The key element here is that it is not armageddon. It won’t be over in a week or month, but will probably play out over the course of the rest of the year.

As a (perhaps bad) analogy, we urge investors to remember the market in the early months of 2002 – the market had already dropped considerably due to the attacks (which drove the dot-com crash even further), and except for security checks at the airport, most things were reasonably unchanged. The market bottomed several months later. Yes, there was fear, and the new normal wasn’t as naive as the old normal, but it began to feel somewhat normal.

Likewise, we expect the rest of this year to be similar, with the occasional setback likemovie releases being delayed or schools being temporarily closed. Expect continued volatility, both up and down, as the market tries to figure out what is fear and what is fact. Also, the governments around the world will try stimulus to bring confidence to the markets, but we think it will have limited effect, as the lack of confidence comes from the fear of getting sick, not from money.

One odd note – the coronavirus seems to have a mortality rate similar to cancer, and nobody buys out toilet paper or water at Costco in a panic over that.

As for oil, all we can say at this point is that aside from the obvious victims in the fracking industry, the unintended consequences of this may be extreme. Unrest in major oil producing countries would not surprise us at all.

Quick Tip

Dollar cost averaging is often misunderstood as buying when the market is down. Rather, it is actually set of pre-planned investments, regardless of market conditions.

For many people that are still growing their savings, dollar cost averaging is a great way to invest as it reduces the emotion in investment decisions. Even if you are en experienced investor, allocating purchases over time tends to drive better decisions.

So how do you start? Let’s say you are going to save & invest $12,000 this year. Simply add $1,000 each month for the next 12 months to your account and add to your position. It’s that simple.

The neat thing is that this works in reverse, too. Let’s say you want to sell out of some investments. Spread those sales over a period of time, again, pre-planned in advance. Whether to sell monthly or quarterly depends on the asset – you probably need to treat company stock differently than a mutual fund for reporting reasons, for instance.

Put a plan in place, and then follow through. The market will go up and down, but your emotions should be left out of the buying and selling. When the market has weeks like we’ve seen recently, keeping emotional decisions in check can save you from making a big mistake with your hard earned money.

Words of Wisdom

“Learn how to see.  Realize that everything connects to everything else”

~ Leonardo Davinci