FINANCIAL MARKET UPDATE 3.3.2020

STORY OF THE WEEK

UNDERSTAND THIS ABOUT VOLATILITY

After a string of seven consecutive down days, patient investors finally found some relief yesterday (3/2/20). The S&P 500 gained 4.6%, the largest single day rally since the volatile fourth quarter of 2018, recouping about a third of the recent decline. Many investors are wondering: where do we go from here?

It is impossible to know if the worst is behind us. The market is said to be rallying based on the expectation the Federal Reserve will further ease monetary policy. While this is usually considered a tailwind for stocks, it does nothing to address the concern that precipitated the market decline. Namely, the global response to the coronavirus has slowed economic activity.

On December 26, 2018 the S&P 500 gained 5.0%, and punctuated the end of what had been a roughly 20% decline in stocks. Could a similar pattern play out today? Maybe. In October 2008, the S&P 500 gained over 10% in a single day on several occasions. It then continued its steep decline for months thereafter.

If you plan to sell out of stocks to avoid a potential big loss, it is very possible you will end up avoiding a big gain instead. As the chart below shows, this can have a disastrous impact on performance. The market has returned 11.45% per year on average since 1990. If an investor missed out on the largest up day each year, their average return would decline to just 7.72%. If they missed the four best days of each year, their average return would be negative! Large up and down days in the market tend to cluster together, and there will not be a signal ahead of time to let investors know the coast is clear.

Source: Morningstar Direct. Stocks represented by the S&P 500 TR Index. Chart shows the average of calendar year returns from 1990-2019 using daily data, and eliminating the specified number of the highest return days. 

Only the future can tell whether yesterday’s large gain was the beginning of a full recovery, or just a temporary blip. As a result, investors should be emotionally prepared for the possibility that we have not yet seen the bottom of this decline. Generally speaking, the worst thing an investor can do is deviate from their long-term plan during the stress of short-term volatility. Like the many rocky periods before, we continue to believe that this too shall pass.

WEEK IN REVIEW

  • The Federal Reserve moved to cut its benchmark interest rate by 0.50% this morning. This marks the first time the Fed has A) changed the rate outside of a regularly schedule policy meeting, and B) changed the rate by an amount more than 0.25%, since 2008. The move was made in an attempt to insulate the economy from the fallout of the coronavirus, though experts are mixed on how much of an impact the cut will have. A move to cut rates by the next meeting was widely anticipated by the market. The new range for the benchmark federal funds rate is now 1.00-1.25%.
  • The Institute for Supply Management (ISM) published an update on the manufacturing sector yesterday. The ISM Manufacturing Index fell to 50.1 from 50.9, anything below 50 signals contracting activity. Prior to January, the index has been in contractionary territory for 6 months as manufacturers felt the impact of global trade disputes.
  • Later this week we will get an update from ISM on activity in the services sector. The services sector makes up a much larger portion of economic activity than manufacturing does. On Friday, the Bureau of Labor Statistics will publish its jobs report for February. The jobs report is one of the most closely watched economic releases each month.

HOT READS

Markets

  • Federal Reserve Cuts Interest Rates By Half Percentage Point (WSJ)
  • Trading App Robinhood Experiencing ‘Major Outage’ for a Second Day… (CNBC)
  • U.S> Manufacturers Slow to a Crawl as Coronavirus bottlenecks emerge, ISM shows (Market Watch)

Investing

Other

  • The Pros and Cons of Refinancing Now (WSJ)
  • The Cognitive Bias that Makes Us Panic About Coronavirus (Bloomberg)
  • How to Prepare for the Coronavirus like a pro (MIT Tech Review)

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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