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Stocks drop as economic outlook worsens due to coronavirus fears

When you have identified your long-term objectives, defined your tolerance for risk, and carefully selected an index fund or a small number of actively managed funds that meet your goals, stay the course. Hold tight. Complicating the investment process merely clutters the mind, too often bringing emotion into a financial plan that cries out for rationality. I am absolutely persuaded that investors’ emotions, such as greed and fear, exuberance and hope – if translated into rash actions – can be every bit as destructive to investment performance as inferior market returns. To reiterate what the estimable Mr. Buffett said earlier: “Inactivity strikes us as intelligent behavior. Never forget it.” – John Bogle

The stock market continued its slide last week as it suffered its worst weekly performance since the financial crisis in 2008. The volatility in the market has also been staggering as the S&P 500 has swung 4% or more in either direction for eight consecutive sessions as investors try to come to terms with the impact that the coronavirus will have on the U.S. economy. The Dow Jones Industrial Average has experienced its fastest decline ever from its recent record high into a bear market and the economic fallout has been unprecedented in terms of its speed and magnitude. Efforts to combat the spread of the coronavirus has turned into a national health crisis, which has undoubtedly plunged the U.S. economy into a recession with the only question being how deep it will be. Both the Federal Reserve and the federal government are pulling out all stops to help mitigate the economic damage. The Fed has cut interest rates to zero, pledged to pump $1 trillion into the economy and promised to backstop prime money market funds. It also has expanded its plan to buy U.S. Treasury securities and mortgage-backed securities to include municipal bonds in order to provide much-needed liquidity to the system. In addition, Congress passed a coronavirus-relief bill that will expand paid sick leave and unemployment benefits for workers affected by the outbreak. A potential $2 trillion fiscal stimulus bill is also in the works which would provide for direct cash payments to individuals, bailouts for certain industries such as airlines decimated by the crisis and low-cost loans to small businesses. Other industries such as restaurants, travel, hotel and cruise lines are also at risk and could be thrown a life line to stay afloat. To help all Americans during these trying times, the Treasury Department also extended the tax filing date to July 15. In the meantime, economic data will almost certainly get much worse before it gets better as weekly jobless claims are likely to soar along with the unemployment rate. Until widespread testing can be administered to people and we begin to see a decline in the number of confirmed cases of people with the virus, fear will likely be pervasive and confidence in short supply.

Last Week

Economic data released last week was inconsequential in light of the coronavirus pandemic. Retail sales fell in February and were less than expected while weekly jobless claims jumped to 281,000 from 211,000 and were at the highest level since September 2, 2017.

For the week, the Dow Jones Industrial Average dropped 17.3% to close at 19,173 while the S&P 500 Index fell 15% to close at 2,304. The Nasdaq Composite Index declined 12.6% to close at 6,879.

This Week

The final estimate for fourth quarter gross domestic product (GDP) should remain at 2.1% while February durable goods orders are expected to show a modest decrease. The final reading for the Michigan consumer sentiment index in March is forecast to decline slightly from the level in February.

Among the most notable companies scheduled to report their quarterly earnings this week include Micron Technology, Gamestop, Nike and Paychex.

Portfolio Strategy

The coronavirus pandemic has caused a health crisis and an economic crisis the likes of which this country has never seen before. The uncertainty and fear has caused the stock market to register its fastest plunge into a bear market in history. It’s important to emphasize, though, that global equity markets have endured eight bear markets over the last 40 years and each time, markets have eventually recovered. The Great Recession and financial crisis in 2008 and 2009 was the last recession and was caused by excessive leverage in the financial system. The system is much stronger now and should allow the economy to recover once the virus is under control. While it is perfectly normal to have the urge to shun risk by selling out of your equity positions, timing the market is next to impossible. If history is a guide, patient investors who have remained invested have been rewarded over a longer time horizon. What matters most is time in the markets, not timing the markets. It is never wise to make emotional decisions based on fear with the investments in your portfolio. For the most part, fixed income investments and bond funds have held up well during this crisis and have provided a ballast in client portfolios. They provide ample liquidity and a reliable source of funds so there is no forced selling of equities in a down market. As efforts continue to contain the spread of the virus and provide much-need monetary and fiscal stimulus to the economy, second quarter GDP is likely to contract significantly. However, later in the year when the economic shock from the virus wears off and pent-up demand returns, both the economy and the markets should rebound.