The Recent Stock Market Downturn
The financial markets are reacting violently to the news of the Coronavirus spreading throughout the world. In our 24/7 news schedule, it is very difficult to avoid the feeling of anxiety when we are barraged at every turn about the dire effects of this virus on both our health and our investments. People seem to be bracing for the worst, with stock markets posting the poorest one-week returns since the “Great Recession.” While the long-term repercussions of this virus remain to be seen, as advisors, we must consider this development in a broader context. Historical Comparison From the beginning of 2008 to the end of 2019, the S&P 500 returns averaged approximately 9% annually, without an interim downturn of 20% or more. This time period has been the longest “bull market” in U.S. stock market history. Recently, we have been trying to educate investors that this has been an unusual time period from a historical perspective and market downturns tend to happen more frequently. The problem is market movements are very difficult, if not impossible to accurately predict from a timing, a cause, and a magnitude perspective. The last material downward move in the S&P 500 took place in 2018. Although the decline did not happen as quickly as this week, the fourth quarter of 2018 returns were down 13.5%. In the following quarter, returns almost fully recovered, with the index finishing the year up 31.5%. In order to guard portfolios against experiencing the full effects of this volatility, we include broad market bond exposures. Because bonds typically behave differently than stocks, they tend to help lower the overall risk of the portfolio during stock market dislocations. For example, as of February 27, 2020, the S&P 500 is down approximately 7.5% in 2020, while the Bloomberg Barclays U.S. Aggregate Index (broad-market bond index) is up 3.0% year-to-date. We continue to include bonds as part of our allocations because they have historically helped offset stock risk in portfolios. Where To Go From Here? No one knows the full effect this virus may have, but there are a number of scenarios that may develop. Fears may turn out to be either be overblown or underrated. Keep in mind there are millions of market participants trading every minute on available information. Each trade reflects the valuations where both buyers and sellers agree, and we do not believe either side has better information. Therefore, as long-term investors, we continue to believe the best course of action during this developing situation is to continue with your long-term financial plan and:
Be sure the amount of risk in your portfolio is appropriate for your long-term goals.
Maintain a diversified portfolio.
Rebalance back to your long-term portfolio targets on a quarterly basis.