Investors found themselves in a uniquely harrowing position this week, as the S&P 500 Index fell into its first bear market (or 20% decline from a 52-week high) since the 2008 financial crisis.
The selloff in stocks has been painfully swift. Two days this week, the S&P 500 fell at least 7%, triggering market circuit breakers, or safeguards where trading was halted for 15 minutes to slow down broad-based declines. All told, the S&P 500 dropped 20% in just 23 calendar days, its quickest descent into a bear market since 1946. It has become apparent that investors’ moods have changed from optimism to panic, with the CBOE Volatility Index spiking to an 11-year high.
These times are unnerving and it’s hard to predict what will happen in the weeks and months to come. But history shows that the market always recovers from bear markets — it just may take a while to get to new highs. For example, in every bear market since 1946, the S&P 500 has taken an average of eight months to recoup losses.
Coronavirus and Oil Fears
Coronavirus has investors understandably on edge, and the situation continues to escalate. In the last week, we’ve heard of school closings, cancellation of major events, and entire international regions shut down. Measures to stop the spread are intensifying, and Wall Street still hasn’t fully grasped the economic impact of the outbreak. To make matters worse, Russia broke from a key OPEC alliance, fueling fears of a price war among oil producers. Crude oil prices slid 21%, and S&P 500 energy stocks dropped 24% this week.
The three sectors that will likely be hit hardest by these events are energy, transportation, and hospitality, which together represent a marginal share of gross domestic product. A significant slowdown across these sectors will undoubtedly leave a mark on economic growth (measured by GDP), but we see a bigger risk to the economy coming from a loss in confidence. A bear market hasn’t always led to an economic recession, but it does show consumer sentiment is fading. Consumer spending is about 70% of U.S. gross domestic product. If spending drops significantly because consumers are uncertain about the future, the economy could be especially vulnerable. Job losses could further exacerbate a decline in spending, and, when combined with the slowdown in energy, transportation, and hospitality, could lead to a recession.
Central Bank Backs Markets
As nervousness among investors grew, central banks stepped in to support the proper functioning of markets. In the past two weeks, the Federal Reserve Board has cut rates and injected $1.5 trillion into the bond market to increase liquidity and ensure markets operate properly. The Bank of England, the European Central Bank, and the Bank of Japan have all taken similar measures, which helped push markets higher on Friday. A lot of uncertainty remains given the lack of clarity on the severity of the economic slowdown anticipated. And markets don’t like uncertainty.
What do I do now?
It’s easier said than done, but don’t fear the bear. Now is the time to focus on what we can control and mitigate risks related to what we can’t.
Before taking any action, always keep your investing goals, risk tolerance, and timeframe in mind. It’s times like these that remind you why you should actively review your asset class allocations to determine if they still align with your plans. While you can’t control financial markets, you can adjust your strategy accordingly.
If you’re a long-term investor and already have a diversified or managed portfolio, it may be best to stay put. But if you have some cash on the sidelines you might consider using a portion of it to take advantage of cheaper stock prices.
You could consider increasing your exposure to safer assets like fixed income to your portfolio if you have a shorter horizon. Historically, bonds have acted as a hedge against stock-market volatility, and they’ve provided ample protection in this pullback as well. The Bloomberg Barclays U.S. Aggregate Bond Index, a fixed income benchmark we track, is up 1% since the S&P 500 highs on February 19. If you have imminent cash needs, reducing your equity exposure may be wise.
Volatility is one aspect of investing, and stocks hit rough patches like these every so often. Luckily, they’ve historically powered through, and the patient investor has been rewarded. No matter what happens next, we’ll continue to be your ally and help you navigate these turbulent times with confidence.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.