We are currently experiencing the fallout due to the spread of the COVID‑19 coronavirus worldwide, including here in the United States. It’s a perfect example of an unanticipated disruption that can wreak volatility in the stock market. And realistically, this epidemic is likely to continue to drive investor uncertainty over the short-term. The long-term, however, is another matter.
As of this writing, there has been a wave of new coronavirus cases in Italy, Iran, South Korea and the U.S. While the number of infected people in the U.S. is still inaccurate due to the lack of widespread testing, there are signs that the infection rate in China – ground zero for where the virus was first detected – is beginning to stabilize.1
After the first U.S. case of “community spread” (when the source of the infection is unknown) of the virus was announced, the reaction on Wall Street was immediate and severe. In the following week, the Dow Jones dropped 12% and the S&P 500 fell by 11%. It was the worst weekly performance for both indexes since the 2008 financial crisis2, and it didn’t stop there. On March 16, the Dow posted its worst one-day percentage decline since Black Monday in 1987.3 The drop followed a press conference by President Donald J. Trump, who announced the U.S. “may be” headed toward recession and that the virus outbreak in the U.S. could last until August.
The Federal Reserve acted swiftly to add liquidity to the economy and restore some confidence to the markets. On March 3, the central bank dropped the federal funds rate to a range of 1% to 1.25%.4 In a surprise move on March 15, the Fed cut rates again, dropping rates to near zero.5 However, dropping rates doesn’t provide much of a remedy in this situation. The economic impact of the virus will likely reduce consumer demand, so companies borrowing more money won’t help much if they don’t have the demand to warrant expansion efforts. While the Fed is primarily focused on sustaining current economic growth, it has very little ammunition left should this crisis escalate further or continue for an extended period of time.
We don’t know how long the COVID‑19 outbreak will last, or its long-term impact on the global economy and investment markets. Therefore, it’s important that any moves you make in response to the crisis also make sense for your long-term goals and financial future.
With this in mind, the following are a few strategies you could consider:
- Hold the line. Certain stock prices may fall based on how much the company’s business model is affected, such as products manufactured in Wuhan, China. However, weigh the temporary price drop against the holding’s fundamentals, its track record and long-term growth potential. Consider longer-term challenges or changes to your own situation before liquidating stocks with a stable record of growth. This is also a good time to assess your stocks, and if you think they are likely to rebound, consider whether it makes sense for your portfolio to purchase additional shares during low price swings.
- Tactical Money Management. You may have thought about moving your money to safer options, and while we don’t recommend selling low, the problem is that we don’t know where the bottom is. Tactical money management is where your money is managed by a funds advisor who decides how much, if any, of your money should be in the market – every single day.
- Convert to a Roth. If you’ve thought about converting tax-deferred assets into a Roth IRA to reduce your income tax bill during retirement, now may be a good time. When prices drop, you’ll owe less tax at the time of the conversion and stand to enjoy greater potential for tax-free growth. Also, if you convert early in 2020, you won’t have to pay those taxes until you file your return in 2021. Keep in mind that a Roth conversion is a taxable event and may have several tax-related consequences. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
- Transfer your risk. One way to help reduce your concerns about this virus or any other pandemic in the future is to transfer the risk of loss from your investment portfolio to an insurance company. By repositioning a portion of your assets to purchase an annuity, you can count on receiving insurer-guaranteed income throughout retirement. Knowing that you have a source of reliable income may also provide some relief about maintaining an equity allocation during periods of volatility.
While near‑term market volatility is likely to continue in the coming months, the long-term consequences will depend on the length of time it takes to get the contagion under control. For now, it remains unclear if the pandemic is severe enough to disrupt the long-term growth of the global economy. However, this is one of those times when that three-to-six-month emergency cash fund we always recommend may come in handy.
If you are concerned with how your accounts are doing and would like to discuss your options, please give our office a call. We are here to help answer any questions and concerns you may have with your accounts, so feel free to give us a call at 801-465-6990, that’s what we’re here for!
This material is for informational purposes only and should not be considered advice. Investment advisory services offered through Retirement Solutions Investments, Inc., a Utah registered investment advisor. Insurance products and services are offered through Retirement Solutions, Inc., an affiliated insurance agency.
1. Worldometer. “Coronavirus.” https://www.worldometers.info/coronavirus/country/china/. Accessed March 19, 2020.
2. Fred Imbert. CNBC. Feb 28, 2020. “The Dow lost 12% in one week. Here’s why andwhat likely happens next.” https://www.cnbc.com/2020/02/28/the-dow-just-lost-12percent-in-one-week-heres-why-and-what-likely-happens-next.html. Accessed March 17, 2020.
3. Rob McLean, Laura He, Julia Horowitz and Anneken Tappe. CNN Business. March 16, 2020. “The Dow had its worst point drop ever as stocks tumbled again.” https://www.cnn.com/2020/03/15/investing/stock-futures-global/index.html. Accessed March 19,2020.
4. Craig Torres and Steve Matthews. Bloomberg. March 3, 2020. “Fed Cuts Half Point in Emergency Move Amid Spreading Virus.” https://www.bloomberg.com/news/articles/2020-03-03/fed-cuts-rates-half-point-in-emergency-move-amid-spreadingvirus?srnd=premium. Accessed March 17, 2020.
5. Kate Duguid. Reuters. March 16, 2020. “Treasuries – Yields lower but moves subdued after Fed cuts rates.” https://www.reuters.com/article/usa-bonds-idUSL1N2B94SY.
Accessed March 17, 2020.
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