Saturday, March 28, 2020

Market Volatility May Create Opportunity

My blogging has been rather light the past few weeks as most of my effort has been focused on our clients' and reaching out to them during these uncertain times. I mostly write blog articles during the evenings and on the weekends and my wife has been hearing me say, "I want to get a blog post done."  So much to write about, but so much going on. With Ohio continuing under a 'stay at home' order, I am writing today.

The government's mandated shutdown that is in place in an effort to slow the spread of the COVID-19 virus has created an unusual economic and market environment.  Our firm's leadership, marketing, technology and human resource staff, have done yeoman's work on assisting in our client communication efforts. Our dedicated website landing page on the COVID-19 topic is just a small example of everyone's effort.

Beyond the health impact of the virus, investors have witnessed a sharp decline in equity markets in both the U.S. and abroad, largely in response to the decline in global economic activity and the commensurate negative impact on corporate earnings. The below chart shows the significance of the decline, down 33.9%, and the speed in which the decline occurred, i.e., 23 trading days.

It is not uncommon to see the equity market trade in wide trading ranges over the course of weeks or several months after declines of this magniture. The chart below shows a period during the 2008/2009 financial crisis where the S&P 500 Index experienced a number of so-called bounces late in 2008. The last four trading days this past week, as seen in the first chart at the beginning of the post, shows the S&P 500 Index up 13.6% from the close on Monday, certainly qualifying as a bounce.

Given the magnitude of the recent market decline and the short time frame over which it occurred we believe investors have the opportunity to evaluate their current portfolio positioning. With the magnitude of the market pullback since mid-February, investors might consider evaluating their asset allocation. In evaluating one's overall investment allocation, a current review might suggest allocating back towards more equity exposure, that is, moving back to a more neutral equity allocation. This review does not mean one must make the adjustment all at one time. Further market lows may occur and that is what occurred in 2008 as the market did not bottom until March of 2009. Having a plan and a discipline around these changes is important, but can enhance one's longer term returns as noted in the recent article, The Traditional Retirement Portfolio of Stocks and Bonds is Down 20% for only the Fourth Time Since WWII.

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