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March 9, 2020

Plunging Oil Prices Deepen Market Fears

Investment Committee

It is ironic that we share this update on the exact same day that the Bear Market attributable to the Great Financial Crisis reached its very own bottom 11 years ago. Earlier this morning, the selling pressure in stocks was intense enough to trigger a 15-minute trading halt after the market’s open. To most everyone engaged in the financial markets, just as in 2009, it sure feels like an awful time to invest. But as many learned from their experience 11 years ago, what feels right is often the wrong thing to do when it comes to building and preserving long-term wealth (as the S&P 500 is up over fourfold since 2009).

The latest development over the weekend was that Saudi Arabia would increase oil production in order to win back market share, the news of which subsequently drove oil prices sharply lower. Oil prices were already down 10% on Friday alone (a huge move in and of itself), before today’s 15% slide on news that the Russians wouldn’t join OPEC in cutting production. Rather than watch oil prices drift lower and lose market share to another faction, the Saudis decided it was better to at least be able to cash flow their kingdom’s budget, even if it means making less money per barrel.

The market’s reaction to this news seems irrational to us. With the coronavirus spreading globally, lower oil prices will surely help the economy in many ways because it is one of the quickest ways to put extra money into the hands of consumers, acting as an instant tax cut by impacting the economy much more rapidly than lower interest rates or a fiscal stimulus package would.

As the chart illustrates, the energy sector makes up just 3% of the total value of the S&P 500. It seems illogical to us that the index might decline by much more than that based on worsening prospects for the sector. In other words, even if the whole energy sector went bust, you wouldn’t expect the market to decline more than its weight in the index, especially when the knock-on effects for others such as airlines and retailers (who use oil) are clearly a net positive.

Of course, one might point out that banks have extended loans to energy firms, but financial institutions are extremely well capitalized and have become increasingly cautious in lending to energy companies over the past few years, so we don’t buy into that argument. Likely, algorithmic traders looked at lower energy prices and reflexively repriced bonds higher due to lower prospects for inflation. The magnitude of this move likely triggered a chain series of trades that was pre-programmed to occur in the event of sharply lower interest rates, which has resulted in all the volatility we are seeing in many financial markets.

From our perspective looking beyond just the next few days and weeks, the prospects of “de-risking” a portfolio only by guaranteeing yourself a 0.5% annual return in a 10-year U.S. Government Bond does not sound like a great proposition, yet that is exactly the current trade-off. Importantly for individual portfolios, diversification is working. Through Friday of last week, while the U.S. stock market was down 8% year-to-date, bonds and gold were up over 5% and 10%, respectively.

As your financial advocate, we remain attentive and tenacious in staying on top of the world and economic news and its impact on the markets. Rest assured, in our over 40 years in business we are confident in a few core principles. First, market timing is fleeting and doesn’t work well in the long run, but adhering to a well-defined strategy does, and following a disciplined process for maintaining one’s allocation and for putting money to work enhances the odds of your long-term success even more. At this moment, it is critical to not let the emotions of the market affect your own game plan. If your game plan is working, “work your plan,” as many strategic coaches would advise. It might not result in a point every time you touch the ball, but it increases the odds of you winning the long game (versus abandoning a well-thought-out and time-tested strategy designed around your goals and objectives). Take comfort that your plan was well designed and market volatility has always been a periodic – and sometimes uncomfortable – part of the investment process that we have prepared for. Please remember that we are here for you and do not hesitate to reach out to your JNBA Advisory Team with any questions or concerns.

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, LLC.

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