Market Volatility: The Known Unknowns

Uncertainty – Global Health and Markets

We are in the midst of an unprecedented global reaction to a new health threat, and it’s thrown many individuals and institutions off balance. The coronavirus is spreading fast, but not as fast as our technology can communicate its threat. There is so much that is still unknown, and that can add to fears of the impact on personal and public health. Controlling or slowing the virus will clearly cause significant disruption in the short term, with sports season suspensions, travel bans, school & arts event cancellations. The goal is to get us back to normalized public health as quickly as possible – and for the long term.

Something similar is true in financial markets as well. There is a great deal that is unknown regarding the certain disruptive impacts on the economy; and yet, financial markets are attempting to react appropriately. As we have observed many times before, investors dislike uncertainty, because it makes it difficult to discern true value. The coronavirus itself, as well as the steps being taken to control it, will definitely have an adverse impact on economic activity in the short term. In the intermediate to long term, though, the most likely situation is one in which the global economy recovers, and grows.

With this dual perspective, what do we advise right now?

We have talked with clients for a long time about the market being highly valued after years of post-recession gains, and the reasoning for our relatively cautious allocation. We didn’t know when a correction would occur, or what exactly would trigger it. We now know the cause, and the timing, and a substantive decline in prices is underway.

Capital preservation, and level-headed action free of panic, is a priority during market activity like we are currently seeing. Markets often overreact, and often react swiftly to legitimate fears, such as the coronavirus becoming a global pandemic. Once prices have adjusted enough, though, opportunities begin to emerge. We can’t know when that moment is reached, any more than we knew ahead of time what would cause this. Today’s market decline in the S&P 500 – down nearly 27% from its peak on February 19 – has brought many stock indices down to a point where we are beginning to consider how to take advantage of pricing opportunities as they develop.

It is important to remember that opportunities lie in the midst of the unknown – not after the storm has cleared. Once it is clear that the virus is adequately contained, markets will already be on their way to recovery.

Moving forward, carefully

We know that we don’t know how long it will take to reestablish a semblance of normalcy in the context of this new coronavirus. We know that we don’t know how low the markets might go in the meantime. And we also know that eventually the market will recover, and if and as prices decline further, opportunity will increase.

We are carefully watching our clients’ portfolios, and taking actions as we deem them warranted to reduce risk, minimize tax impact, and take advantage of emerging opportunities. If you or someone you know would benefit from a conversation about our services or the markets, please be in touch.

And for everyone, please take care of yourself!  Be healthy, be careful.  Take a walk, breathe some fresh air, drink plenty of water, and take a break from the news feed periodically.