Investors are at a crossroads
There’s a bleak case to be made about investing in this pandemic: massive unemployment, destruction of global demand for goods and services for the foreseeable future, and a human toll of new infections in the 3rd world not even yet calculable. We’ve already seen its full might: a drop of 30% in U.S. stocks within a couple of weeks (since rebounding 27% from its March 23 low; and note, it will take another 21% return to reach the original February 20th high.)
However, there’s also a bullish case, including the reinstatement of federal reserve tools used in the 2008 financial crisis, such as quantitative easing, a rate cut to zero, $2.5 trillion stimulus used to purchase market securities that bail out companies and create liquidity, and recent news that the virus might be reaching its peak in the US and Europe. With the market reacting positively to recent efforts, it appears that stocks may no longer require earnings to be successful, as it feeds on Fed intervention without any other consideration.
Investors are at a crossroads. With interest rates at zero, there’s no safe place to put money while maintaining purchasing power. Bonds are safety bets that will remain volatile as they’re being traded like never before. Stocks may be the only vehicle that preserves purchasing power over the long-run, however, volatility will likely take us for a wild ride.
With S&P500 companies likely seeing the bulk of the government stimulus, divesting from smaller U.S. companies may make some sense. Emerging markets, such as India and the Middle East, have yet to register the impact of the coronavirus. China, however, seems to have shown significant improvement as its stock market looks unaffected. International markets will likely be reeling from this crisis for years unless their respective governments can provide sufficient stimulus.
Technology companies along with other growth stocks appear less impacted from the market meltdown and may be a worthy investment going forward. Utilities may benefit from a lower rate environment as they are highly leveraged. Energy is reeling from the loss of global demand and OPEC’s price war with Russia. Real estate felt the crunch of illiquidity as they were desperate to meet cash flow demands. Mortgage companies are also squeezed as they’re making bond payments while homeowners defer on their mortgages; I suspect they’ll be bailed out to a degree.
Now’s the time to revisit your risk tolerance. The S&P500 is at the June 2019 price-level and where it goes from here is still largely unpredictable. If the recent turmoil kept you up at night, then let’s discuss reducing portfolio risk while maintaining your commitment to long-term goals and the financial plan. Call me a for consultation at (760) 537-0791 or book online at eurekawealthmanagement.com.
FT: 4/9/20 "Markets are only starting to come to terms with the new normal" by Michael Mackenzie link