FINANCIAL MARKET UPDATE 3.24.2020

STORY OF THE WEEK

CONTROLLING WHAT YOU CAN

A critical concept investors must understand is that markets are forward looking. This means prices reflect the aggregate of all future expectations. As a result, stock prices will often decline (rise) ahead of bad (good) data. With the S&P 500 down over 33% from its mid-February peak, the market is definitely expecting some bad news. We are now on the precipice of those expectations becoming reality. As coronavirus testing ramps up, the number of confirmed cases will likely jump. At the same time, economic data (which is backwards looking) is going to start reflecting the impact of the virus on business and consumer activity. The news flow has been scary, but it will probably get worse before it gets better.

The real question relates to how expectations will compare to reality. The market has already priced in a great deal of the bad news that we are about to get. Has it fallen too much? Or not enough? It is impossible to know in advance, and it is out of our control. Instead of dwelling on this, investors are better served by focusing on what they CAN control.

Recent volatility has presented a variety of opportunities for investors. For those that are not in or near retirement, the selloff provides a BIG opportunity to invest at a steep discount. Many investors could also benefit from “rebalancing” their portfolio. Balanced portfolios made up of both stocks and bonds have likely seen their allocation to stocks fall relative to their bonds. The act of rebalancing moves the portfolio back to its target by selling what has done relatively well (bonds), and buying what has done relatively poor (stocks). Effectively buy low/sell high. Finally, tax loss harvesting can be beneficial for any taxable investor. Tax loss harvesting involves realizing losses on certain positions, and investing the proceeds into a similar (but not substantially identical) investment. The losses generated can be used to offset other realized gains and a certain amount of ordinary income in the current tax year, while unused losses can be carried into futures years. Each of these items are within an investor’s control, and offer a way to take advantage of an otherwise scary and tumultuous event.

Remember this important concept: markets are forward looking. Stock prices fell in advance of the bad news arriving. Like all of the past challenges our nation has faced, we will overcome this threat. Expect prices to rise ahead of the good news.

WEEK IN REVIEW

  • On Monday the Federal Reserve dramatically increased the level of support it is providing to the markets. Headlining the new support measures is a new program called the Secondary Market Corporate Credit Facility. Under the program the Fed will begin purchasing corporate debt (in addition to the previously announced agency mortgages and Treasury bonds). This includes individual investment grade bonds, and ETFs that are comprised of investment grade bonds. The corporate bond market has been under pressure amid the coronavirus fears, and the Fed’s purchases is designed to provide some stability.
  • Congress continues to work on a large stimulus bill aimed at mitigating damage to the economy caused by the coronavirus. The amount of stimulus being discussed would be very large, even compared to what was rolled out during the financial crisis.
  • Last Thursday the market got a small taste of the bad economic data to come. The number of new individuals filing unemployment increased by roughly a third, and the number is expected to increase even more dramatically this Thursday. Today we will get an early look at activity in the services and manufacturing sector when HIS Markit publishes its flash (early estimate) PMI data. This survey based data is expected to reflect a sharp drop in sentiment and activity during the month of March.

HOT READS

Markets

  • Fed Surprises Market With Program to Support Corporate Bonds Amid Coronavirus Pandemic (CNBC)
  • Congress is Getting Closer to a Deal on the Massive Coronavirus Stimulus Bill (CNBC)

Investing

  • What if You Buy Stocks Too Early During a Market Crash (AWOCS)
  • The Panic of 2020? Oh, I made a Ton of Money – and So Did You (Zweig)
  • Bird in the Hand (TheBelleCurve)

Other

  • This is your Brain on a Crashing Stock Market (Zweig)
  • Coronavirus ‘Infodemic,’ Here’s How to Avoid Bad Information (WSJ)
  • Blood Donations Needed During Coronavirus Pandemic (CNBC)

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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