Allworth Chief Investment Officer Andy Stout shares some of the specific triggers behind this latest stock market drop.
Over the past couple of weeks, market turbulence has ramped up due to fears surrounding the economic effects of the coronavirus. As of this morning, markets are also responding to another issue – oil prices.
Before we go into the specifics of what’s been driving this turbulence, it’s important that you know that we are closely monitoring the situation. If you have any questions, please just let us know.
In many ways, stock prices are based on what the future might hold. When there are short-term issues (such as we have now), the future seems less clear. This uncertainty can make investors feel emotional and wonder if they have the right plan in place.
Of course, while we didn’t specifically plan for turbulence stemming from this coronavirus, for more than 27 years we’ve created financial plans that account for unexpected turbulence and uncertain outcomes.
That’s what we do.
We repeat this often, and it certainly bears repeating now, but the key to retirement success and peace of mind is having a well-designed financial plan and sticking to that plan. This will help you see beyond the headlines and avoid making emotional decisions.
Let’s talk about oil
Last week, the Organization of the Petroleum Exporting Countries (OPEC) and Russia met to discuss cutting oil production to stem the recent decline in prices. The talks broke down when Russia balked at cutting its production.
Ironically, Saudi Arabia’s response was to announce it will increase its oil production. (They currently produce just under 10 million barrels per day, and it’s thought that it could rise to around 11 million. This caused oil to fall about 20% compared to last Friday.)
While lower oil and gasoline prices could help consumer confidence (working to counterbalance the impact of the fears surrounding the coronavirus), the concern for investors is that lower prices will take too big a chunk out of the energy companies’ profits.
Now, about the coronavirus
The other big fear is the rising amount of coronavirus cases outside of China. Within China, the active cases are falling, as more than 58,000 infected Chinese citizens have recovered. (In fact, due to the decline in active cases in China, the country is now closing the makeshift hospitals it built to help treat those afflicted with the virus.)
Outside of China, new infections are on the rise, with Italy, Iran, and South Korea each reporting at least 4,000 active cases. In the U.S., there are now at least 600 cases.
While the actual severity of the coronavirus has yet to be fully determined, bold headlines are causing much of the market turbulence we are experiencing right now.
Keep in mind that volatility is normal. Going back to 1950, declines of 10% have happened about once a year and declines of 20% or more have happened about once every six years.
That’s not only a long history of consistent turbulence, but it’s also simply a part of investing. These downturns don’t last forever, and, as history shows, stocks have recovered from these declines every single time.
Furthermore, this isn’t the first time the world has dealt with a viral outbreak. In just the past 20 years, we’ve seen outbreaks of SARS, the bird flu, the swine flu, MERS, Ebola, and Zika, just to name a few.
It’s unknown when we will move past the coronavirus, but history strongly suggests we most certainly will.
What are circuit breakers?
This action by Saudi Arabia resulted in stocks falling once the market opened. This triggered something called a circuit breaker. Circuit breakers are safety measures that halt stock trading when there is a large, sudden move. The purpose of the circuit breaker is to slow down trading so traders can rationally assess the situation.
There are three circuit breaker levels, and the first level circuit breaker transpired this morning. The first level occurs if the S&P 500 Index falls 7%, causing all stock trading to halt for 15 minutes.
The second level is triggered when the S&P 500 falls 13%. If this happens before 3:25 pm ET, trading is again halted for 15 minutes. If it happens after 3:25 pm ET, trading will continue without a pause.
The third level occurs if the S&P 500 falls 20%. In this instance, all trading is halted for the remainder of the day.
Looking Forward
Both the global and the U.S. economies are slowing down, but the data does not yet point to a recession. Indicators remain strong, so whether we have a recession because of the coronavirus remains to be seen. We will, of course, continue to monitor and analyze the situation.
We strongly believe that if you refrain from making emotional decisions and stick to your personalized financial plan, you will be in the best possible position to not only thrive, but to enjoy your retirement to the fullest.
As always, please let us know if you have any questions, or if we may be of service to you in any way.
