Financial markets are reacting to the global spread of the COVID-19 virus. While we are tasked with focusing on the economic and market impacts of the virus, our first concern continues to be around those impacted and the brave health care workers helping the afflicted. Investors are feeling anxious as markets are moving sharply lower so our team wanted to keep you informed and try to cut through the market noise.
Investors are worried about the virus and rightfully so. The virus has a direct economic impact because businesses, organizations, and individuals are increasingly not working, staying home, and limiting human contact. This has a clear and direct impact on both the supply and demand sides of the global economy. Potential travel limits, factory closings, and school closures impact the supply side – the ability of economies to produce goods and services is reduced. Fewer trips to malls, restaurants, and sporting events impact the demand side and result in lower consumer spending. Sharp stock market drops also contribute to lower consumer demand as household wealth is impacted.
The stock market is a forward-looking mechanism. In other words, investors buy stocks in anticipation of what the economy and corporate earnings will look like in the future. With COVID-19 clearly going to have an impact, stocks have suffered sharp losses as it remains too early to see the full effect that it will have on the economy and how businesses will react to it.
Looking forward, have we seen the end of this market selloff? No one knows the answer to this question, and it is a very fluid situation. We do believe that more stock market weakness is possible as companies get a clearer view of the impact of the virus and start to reduce their outlooks. As businesses reduce their sales and profits expectations, stock prices could follow lower.
While there is a clear risk to stocks in the near-term, we do see some reasons for optimism. First of all, areas that were initially inflicted, such as China, have already begun to see a slow but positive return to normalcy as businesses start up again and workers come back to their jobs. Second, coming into the emergence of COVID-19 in the U.S., the domestic economy was in a good place given strength around the consumer, the housing market, and the services industry. Third, the combination of the severe drop in oil prices caused by the price war between Saudi Arabia and Russia along with a sharp drop in interest rates should be a boon for you and me, the consumer. When some normalcy returns to the U.S. after the virus dissipates, as it has done in China and South Korea, $30 oil prices and near-zero interest rates are essentially a tax cut for the American consumer.
Lastly and most importantly, similar to what other nations have done, we do expect some additional economic stimulus out of Washington that would improve investor optimism. So far, the government has enacted some measures that include giving the Small Business Administration authority to issue loans to small businesses affected by the virus and the Treasury Department will defer tax payment, without interest or penalties, to certain affected individuals and businesses. We expect additional stimulus to follow that possibly includes payroll tax relief and targeted financial relief to the most-affected industries (such as travel, hospitality, and leisure).
This current market volatility will remain with us for the foreseeable future. We are focusing on potential actions in two areas – what is being done to reduce the spread of COVID-19 and what fiscal stimulus measures are being enacted to reduce the economic uncertainty caused by it. Since we cannot predict when, or if, these will occur, it highlights an important and time-tested strategy that you should follow – a diversified and well-balanced investment portfolio can help mitigate the difficult market days.
This is an extremely volatile market and being diversified is very important by not having too much risk exposure to one asset class or security. Focusing on long-term risk and return objectives is important as we want to help you stay on course and focus on the things you can control in your portfolio.
Our team will continue to monitor the spread of the virus as well as its economic and market implications. If you have any questions whatsoever, please do not hesitate to contact us.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.