Market Update: Coronavirus Impact
On Monday, March 9th, the New York Stock Exchange (NYSE) halted trading via a procedural tool called a circuit breaker. Circuit breakers were implemented to allow for the market to halt the trading of stocks during periods of extreme uncertainty. There are 3 circuit breaker levels that can be triggered: down 7%, down 13%, and down 20%. Each breaker has different outcomes based on what level is reached. The circuit breaker triggered this morning at 9:35am was in response to the market’s 7% drop. Accordingly, the NYSE halted trading for 15 minutes to allow the market to catch its breath and regroup.
Why is the market so volatile?
There is a global lack of certainty of how far the Coronavirus will spread. The US travel and leisure industry has been heavily impacted by the global slowdown in travel. Recent estimates have reported the Coronavirus could cost airlines $113B in lost revenue. Yesterday, the U.S. State Department issued a travel advisory that says citizens, especially those with underlying health conditions, should not sail on cruise ships. And with nearly 70% of US gross domestic product (GDP) driven by consumer spending, the market has reacted strongly to what it perceives as a threat to the continued growth of the US economy.
To complicate matters further, this past weekend saw a fallout among Organization of the Petroleum Exporting Countries (OPEC) members regarding how much oil should be brought to market. OPEC failed to reach an agreement on production cuts with both Russia and Saudi Arabia. In the end, Saudi Arabia has signaled that they would increase production by nearly 10mil barrels per day starting in April, thus driving down the cost of oil in a punitive measure that has rippled throughout the markets. The market has strong concerns that this will have a material effect on energy companies as they struggle to remain profitable, and potentially the financial sector companies that have loaned them money and are concerned about being paid back those loans.
At this point, the markets have signaled they are looking for the US Federal Reserve to intervene and provide more stimulative relief, again in the form of lower interest rates, by the time the Fed convenes its next meeting on March 18th. Federal Funds Futures indicate a nearly 100% likelihood that the government will act accordingly. This should help soothe some concerns that market participants have about whether or not US companies can continue to remain profitable over the next few quarters as we start to see the true impact of reduced earnings as a result of the Coronavirus.
We know, it is difficult to stay calm and carry on.
It is normal to have fear and concerns about this volatility. Indeed, it is a scary time, however, if history is a guide, this crisis too will come to an end, and the markets will recover. Historically, the markets regain lost ground very quickly.
This is the biggest reason AAFCPAs Wealth Management stresses the importance of portfolio diversification and in taking a long-term view. After two weeks of mostly selling in the global stock markets, bonds have helped to mitigate portfolio losses for our clients.
Our retirement planning methodology and tools simulate our clients’ portfolio’s performance in good markets, average markets, and bad markets. We consider the good and the bad when developing their financial plan. Sometimes the best decision an investor can make at a time like this is to take no action. Holding on during extreme periods of volatility is often the right answer. If action is advisable, we will reach out directly to inform clients of the best approach.
If you have any questions about your personal financial plan, please contact: Carmen Grinkis, PhD, CLTC, CFP® at 774.512.4061, firstname.lastname@example.org; Andrew E. Hammond, CFP® at 774.512.4143, email@example.com; or your AAFCPAs Wealth Advisor.