FINANCIAL MARKET UPDATE 3.17.2020

STORY OF THE WEEK

LARGE ONE-DAY MARKET DECLINES

Over the course of the last week the market has experienced extreme volatility. The last three days alone have seen the largest one-day drop since 1987, the largest one-day gain since October 2008, followed by the new largest one-day drop since 1987. These dramatic price moves come as the market incorporates new developments, and tries to anticipate the ultimate impact on businesses and the economy.

It does not matter who you are, seeing the value of your portfolio decline is painful, and watching the market register these large drops in rapid succession will make you feel the pain won’t end. History, however, shows us that it will.

The table below highlights the 20 worst one-day declines for the S&P 500 going back to 1950, and how it performed over a handful of subsequent periods. It turns out the market has responded to these large drawdowns in a variety of ways. In some cases stocks have rebounded quickly and delivered positive returns over all subsequent time periods. Other cases were followed by negative returns in the near-term, with positive returns coming over the longer time periods. There was even a case where the market rallied immediately after, only to decline again over the longer periods (but ultimately recover).

Source: Morningstar Direct. Data from 1/1/1950 to 3/16/2020. Stock Returns are based on the S&P 500 price return index, and exclude the effect of dividends. Return series greater than 1 year is annualized.

The important take-away resides in the green summary section of the table. Here we compare average performance following a large decline with the typical market experience over the entire (roughly) 70 year period. Not only have stocks generally been positive following a large decline, they have actually been materially higher than normal. The bottom line is lower prices today lead to higher returns in the future.

Recent volatility in the market is without a doubt unnerving. Just remember the decline in your portfolio is not permanent unless we make it so by selling. The reason we maintain some assets in cash and bonds is to get through these tough times without needing to sell stocks. We are fortunate to have a wonderful group of clients that understand this and have maintained discipline and patience. We know it’s not easy, so please don’t hesitate to reach out to us if you need to.

WEEK IN REVIEW

  • On Sunday afternoon the Federal Reserve made a surprise policy announcement aimed at supporting the economy and financial system amid the fallout from the coronavirus outbreak. The federal funds rate was reduced by 1.0% to a new target range of 0.00-0.25%, following up on a 0.50% cut to the rate just days prior. Additionally, the Fed reduced the discount rate (rate at which banks can borrow from the Fed) to 0.25%, and announced it will restart a bond purchasing program known as “quantitative easing” (QE). While the Fed may still have other tools at its disposal, this move represents a significant use of its available firepower.
  • In addition to the monetary policy announcement, there appears to be movement on the fiscal front. Over the weekend the White house endorsed a new bill that has since been passed by the House of Representatives, and is currently being debated in the Senate. The bill would provide free coronavirus testing to anyone whose doctor says needs one, increase paid sick leave, extend unemployment benefits to furloughed workers, and increase funding for state Medicaid programs. The Senate is expected to quickly pass the bill.
  • Additionally, Treasury Secretary Steven Mnuchin is expected to ask congress for an additional stimulus package of $850 billion, that would include measures like an airline bailout, payroll tax cut, and a delay in tax deadlines. 

HOT READS

Markets

  • Fed Takes Emergency Steps as Virus Pushes Economy Toward Recession (WSJ)
  • Fed Deploys Its Full Arsenal, but It Still Has Some Tools (WSJ)
  • Mnuchin to Ask Congress for $850 Billion Virus Stimulus Package (Bloomberg)

Investing

  • Stocks Are in Chaos. Control the One Thing you Can (Zweig)
  • The Historic Sell-Off & a Game of Expectations (AWOCS)
  • What Happens After The Stock Market Falls (Irrelevant Investor)

Other

  • Why Outbreaks Like Coronavirus Spread Exponentially, and How To “Flatten the Curve” (Washington Post)
  • Coronavirus Social Distancing Forces Painful Choices On Small Businesses (WSJ)

ECONOMIC CALENDAR

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

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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