In a recent round of investor risk aversion, the S&P 500 logged its worst weekly decline since the Great Financial Crisis. The market has officially entered correction territory (10+% decline) as the worldwide spread of the coronavirus has stoked investor fears that economic growth and profits will take a substantial blow in the quarters ahead. This communication is a follow-up to our email sent on February 25.
Likely on a lot of investors’ minds is the concern of stocks trading down a lot lower from here, and should any preemptive measures be taken now? A very fair question and one we will address in the following paragraphs.
First, it is important to keep in mind that stock weightings across JNBA portfolios entering last week were, on average, already underweight relative to our base/neutral targets due to our more cautious outlook. This has been a helpful first line of defense against markets falling under pressure. While we can always reduce stock exposure further from here, this current underweight position has given us time to more thoroughly evaluate the environment to determine any needed changes to allocation based on what we know.
Second, based on what we know and the research we leverage for decision making, it is our view that what is taking place is heavy panic selling based on fear and not prudence. In some cases, sell orders are simply being executed by a pre-determined computer algorithm without so much as a thought to the true reason behind it (welcome to 21st century trading). While much uncertainty is attached to the coronavirus, most experts seem to be in agreement that this outbreak is likely to be transitory – especially as it pertains to a drop in economic activity. Since stock markets discount the future, even if the news headlines worsen in the weeks ahead – unless it is worse than what is currently expected and already “priced into” stocks – the market decline should be mostly in the rear view mirror. Furthermore, we expect policymakers to mount a strong response and for the Fed to come to the rescue, as markets are now pricing in two to three interest rate cuts over the remainder of 2020.
Third, if what ends up happening is containment of the virus sooner than expected, stocks could easily experience a fierce and quick recovery rally, in which case those who abandoned their strategy would experience a permanent loss of capital they are unable to make back. What we try to accomplish is strike the right balance of providing prudent protection based on risk inherent in the environment, without becoming too conservative and running the risk of being caught flat-footed when markets recover (often times with very little warning!). As a result, we feel at this time we have sufficient insulation in client portfolios with our current underweight in stocks, and do not plan on reducing our exposure any further at this point.
The uncomfortable reality is that although we are experiencing a news-driven stock market sell off that is invoking great emotion, it is following a year of robust gains where some level of profit-taking would not be considered unusual. Of note, we also view this as a potential buying or rebalancing opportunity across various portfolios and will monitor the situation closely to determine if and when such action is warranted. With bond yields at record lows (the 10-Year Treasury yielding below 1.2%), we think the environment will favor stocks once the virus is better understood and contained, and panic selling subsides.
In summary, the JNBA Investment Committee has the ability to reduce risk further if our view changes, but for now we feel the more prudent thing to do is hold steady and monitor closely, followed by selective additions/rebalancing to risk assets when they have become underpriced. We do not anticipate this topic disappearing from the news anytime soon, which will likely mean more stock market volatility. However, we want to reiterate that we strongly believe the best course of action for investors is to hold fast to their plan and consult their advisor, with the knowledge that markets tend to go up over long periods. To that end, we’d like to share this chart above which shows that the typical year often experiences at least one 10% market correction, but that annual returns have been positive in 30 of the last 40 years. At times like this, it is important to remember that obtaining your share of the market’s long run performance is best ensured by playing the long game, instead of being buffeted about by week to week or month to month market gyrations.
As always, your JNBA Advisory Team is available to consult with you to discuss your specific situation in order to determine if any changes need to be made. We appreciate the trust you have placed in us.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.
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