FINANCIAL MARKET UPDATE 2.25.2020

STORY OF THE WEEK

stocks are down, is it time to worry?

The S&P 500 has recently declined roughly 4.7% since registering an all-time high last week (Wednesday). The majority of this fall came yesterday (Monday) with the index falling 3.35%, the largest single day drop since February 2018. The catalyst for the selloff is related to news that confirmed cases of the  coronavirus have increased outside of China, particularly in Italy and South Korea.

It is important to remember that selloffs of this magnitude (or larger) are a normal part of the ebb and flow in the market. The table below illustrates this point. Declines of 5% or more generally occur about three times a year, while a 10% decline occurs about once a year. The last 5% decline was in the third quarter of 2019, and we have not seen a 10% or greater decline since the fourth quarter of 2018. So in a sense, we were overdue for a pullback. Based on the data below, it would not be unusual for the market to decline another 5% from here.

Source: Capital Group, RIMES, Standard & Poor’s. 1Assumes 50% recovery rate of lost value. 2Measures market high to market low. 3The average frequency and average length rows exclude the most recent decline in December 2018 because the 50% recovery of lost value occurred after 12/31/18.

By most measures the S&P 500 is expensive, and investors have been more bullish on stocks than usual(1). Such an environment has historically proven to be ripe for a pullback. While the cause may not always be as frightening as the coronavirus appears to be, there is always something.

It’s perfectly natural for investors to want to avoid the pain of a short-term decline and move some or all of their assets to the safety of cash. In reality, however, investors would likely be better off staying the course. If you make periodic contributions to your portfolio, relish the fact that your next investment is going to buy more stocks for you than it would have a week ago. For those taking distributions, the fixed income allocation is there to provide stability and cover cash needs during periods of stress.

Warren Buffett said it best during an interview on CNBC yesterday (Link):

“When stocks are down we are going to be buying on balance, and who wouldn’t rather buy at a lower price than a higher price? …most people are savers, that means they’ll be net buyers, they should want the stock market to go down, they should want to buy at a lower price”.

(1)  Based on the most recent publication of the American Association of Individual Investors (AAII) Sentiment Survey

WEEK IN REVIEW

  • Last week data provider IHS Markit published their early (flash) estimates of services and manufacturing activity for February. This services sector, which is much larger than the manufacturing sector, surprised to the downside, declining from 53.4 to 49.4 (anything below 50 signals contraction). This marks the first time since 2015 that services activity has contracted, a bad sign considering the services sector has been the main engine of growth, while the manufacturing sector has taken the brunt of the damage from the trade conflict with China. The PMI indices are based on surveys, however, rather than actual economic data it is possible that the reading is merely a decline in sentiment rather than actual economic activity.
  • As of last Friday, 87% of companies in the S&P 500 have reported earnings for the last quarter of 2019. With initial estimates for earnings at -1.7%, actual reported results have exceeded expectations. If you combine the actual results for companies that have reported, with the estimates for the remaining firms that have yet to report, Q4 earnings would come in at +0.9%. If earnings finish positive, it would be the first time since Q4 of 2018. This is extremely important, as earnings need to grow in order to justify further gains in the stock market.
  • On Thursday we will see the first revision of Q4 GDP, which economists are not expecting to deviate from the initially reported 2.1%. We will also get an update on business investment from January. On Friday we will get an update on inflation as well as consumer sentiment.

HOT READS

Markets

  • Fear of Coronavirus, Rather Than Virus Itself, Hits Economies (WSJ)
  • Warren Buffett on Buybacks, Apple, Bitcoin and the Outlook for Berkshire Stock (Barron’s)
  • Suze Orman’s Advice to Investors on The Market’s Drop: “Rejoice” (CNBC)

Investing

Other

  • Losing $450,000 in Three Days: Hackers Trick Victims Into Big Wire Transfers (WSJ)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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