Will “10% Off” Be Enough To Attract Investors?

Although fear continues surrounding the long-term effects of Novel Coronavirus (COVID-19), the worst, as far as the markets are concerned, may be coming to an end. Markets have already begun to rebound based upon concerted central banking promises to ensure liquidity during any economic slowdown resulting from COVID-19.  The end of February may have signaled that “last best” time to buy that we anticipated would accompany a Q1 market pullback.

Here’s where the markets ended last week:

• The Dow fell -12.4% (3,583 points)
• The S&P dropped -11.5% (383 points)
• The Nasdaq lost -10.5% (1,009 points)
• Russell 2000 Small Caps declined by -12% (202 points)

And, of course, it wasn’t just U.S. stocks; the EAFE International Index also fell -8.8% last week.

The  panic selling last week was the result of doom and gloom coronavirus headlines coming from virtually every media outpost.  A look at previous viruses, however, shows they have very little long-term impact on the markets:

Investors remain scared and uncertain about the future, so many are selling. Instead, they should be buying, or at least holding fast!  Remember, the worst time to sell is when everyone else is selling.  Warren Buffet may have said it best, “Be fearful when others are greedy and greedy when others are fearful.”

Over the past 40 years, there have been 13 corrections (not including the current one). The average size has been around 14.5% with an average length of nearly 3.5 months. The current decline has been close to 14.5%, but within 6 days (so far).

This bull market that started in 2009 is nearly 11 years old. One of the greatest and longest bull markets ever happened during the roaring 90s, and that one was filled with its share of corrections, as well.  The faster the market falls (just like a rollercoaster), the scarier it can be.

The last correction we had was in the 4^th quarter of 2018, and that one took place over a 3-4 month period. Many, at that time, were saying a recession was inevitable, but what happened next? 2019 was one of the best years in the history of the market!

COVID-19 is a tragedy, and we encourage you to join us in prayer for those who have been impacted and those who will be in the future.  Many have lost their lives and it appears many more will, too.  As we noted, last week when comparing COVID-19 to the flu, perspective is often the key to managing the urge to panic.   Fear is being overstated.

This isn’t the first correction the market has ever seen, and it definitely won’t be the last. Dramatic corrections like the one we are experiencing are part of being an investor.  The markets don’t provide the best opportunity for long-term returns we have, as stewards, because they are low risk.  There are risks involved, but a disciplined, diversified portfolio provides us with the best defense against risking more than the potential for reward.

Diversification not only allows us to withstand unexpected downturns, but it also allows us to be ready for the real danger ahead.  Regardless of how quickly COVID-19 fear subsides, three of the world’s biggest economies (Germany, China, Japan) are on the brink of a recession:

• Germany: Posted flat GDP growth for its fourth quarter, and its purchasing managers survey remains below 50 (sign of contraction)
• China: The China Association of Automobile Manufacturers announced that sales declined 18% in January.  Due to COVID-19, some economists are now forecasting 0% first-quarter GDP growth in China.
• Japan: Japan’s GDP plunged 1.6% in the fourth quarter, the largest contraction in nearly six years.  Additionally, Chinese supply chains have impacted Nissan and other major Japanese manufacturers. This could lead to a negative GDP for Japan’s first quarter of 2020.

All of this fear is creating a massive sell-off in global yields.

• The yield on the 10-year German government bond now sits at around -0.51%.
• The yield on China’s 10-year Treasury just slipped below 3% for the first time in many years
• The yield on the 10-year Japanese government bond is about -0.10%.

As a result, global demand for U.S. bonds has been relentless.  Foreign investors are looking to benefit from the strong U.S. dollar and seeking higher U.S. yields. A health dose of fear is always warranted in times like these, but we cannot let its overstatement dictate our actions.

Faith, the opposite of fear, is being very understated these days. God is in control of everything, including the financial markets and economy. If it is His will, we will see the economy and the markets rebound as fear subsides.  Along the way, we will do our best, as your trusted resource, to keep fear from impacting our long-term strategies.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
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