You may feel a bit anxious after the sharp up and down movements in the market this week, and you’re not alone. This is an unusually turbulent market. Coronavirus may lead the headlines, but the Federal Reserve Board’s (Fed) emergency rate cut on Tuesday, and a narrowing of the Democratic presidential nominee also played a role in the volatility. Having little to no impact on markets was the solid economic data received, not the least of which was the February jobs report released this morning. All told, the S&P 500 Index ended the week higher by 0.6%, taking us back to where we were just five months ago.
One thing is for sure, volatility remains persistent. The S&P 500 Index traded in a daily range (that’s the distance from the high price of the day to the low price of the day) of 3% for five straight days through March 4. For context, the S&P 500 has posted at least a 3% daily range in just 4% of days since 1990. It’s not that common. On Tuesday, the index traded in a 5.1% intraday range, its widest daily range in eight years.
This has led to a growing sense of panic in financial markets as investors try to predict what the economic and corporate impacts of the coronavirus outbreak will be. The Fed’s surprise cut only fueled worries that economic weakness could be ahead. In response, the yield on the 10-year Treasury reached a new all-time low of 0.66% today, signaling market participants anticipate slowing growth and additional rate cuts from the Fed. The VIX Index, a gauge of market nervousness, is near multi-year highs, signaling more swings may be in store.
A Few Bright Spots
We did see a few encouraging developments this week. The February jobs report showed a whopping 273,000 new jobs were added in February and wages grew 3.0% year-over-year. Further, jobless claims for unemployment benefits remain low, a leading indicator for jobs growth going forward. On the other hand, many corporations are beginning to implement work from home policies, conferences are being cancelled and schools are closing. This will have a near-term impact on demand, especially in the services sector. Until data provides clarity on the growth trajectory, uncertainty will be a driver of market action.
As such, we see volatility continuing in the short-term. While volatile periods are tough to stomach, history shows that times like these do eventually subside and returns are still achieved over long periods of time. The last time we saw this level of volatility was in 2011 during the U.S. debt ceiling and European sovereign debt crisis. The S&P 500 declined 19% from August to October 2011 as uncertainty shocked the markets, then surged more than 20% in the following five months. That was one of the five corrections the S&P 500 has endured over the past 11 years, while posting 15% annual returns.
Downside in equity markets could continue to be driven by a lack of stabilization in Treasury yields, elevated VIX levels, a premium price-to-earnings ratio on the S&P 500, and an increased spread of the coronavirus domestically. Increased federal spending targeted at helping those impacted by the coronavirus, increased productivity out of China, and better than feared economic data around the world would help reduce volatility in the marketplace.
What should I do?
The most important thing to remember as an investor is your time horizon. If you have short-term cash needs, less than 3 years, then reducing equity exposure may be appropriate for you. Long-term investors have performed best by remaining committed to their investing plan and updating it regularly.
Our Cash Enhanced Managed Portfolios were built to help ease customer anxiety in periods like these. These portfolios hold 30% of investable assets in a cash account to help buffer the volatility of the market, and could be worth exploring if you feel the need to take a more conservative approach.
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.