The markets continue to exhibit extreme volatility with large swings as investors try to adjust to The New Normal. The markets have seen unpredictable moves over the past several weeks and are down substantially from the peak levels of February 2020.
The S&P 500 index and the Dow Jones Industrial Average are down almost 35% from peak levels and have reversed all gains made after President Donald Trump took office in January 2017. On Tuesday, the Dow surged to its biggest one-day gain in over 85 years on signs that lawmakers and the Trump administration were nearing a deal on a stimulus package to curtail the economic fallout of the coronavirus pandemic.
The current environment is driven primarily by The Coronavirus Pandemic and various policy interventions to combat recession fears and pricing uncertainties.
The Coronavirus Pandemic
The coronavirus continues to spread globally and exponentially. Pandemic management efforts are underway to slow the spread of the virus and flatten-the-curve to reduce the number of critical cases and manage the overloaded healthcare system.
| Many countries have announced measures of a “complete lockdown” as borders are being shut and trade between countries is being impacted negatively. These sudden “black-swan” events are reducing the output of the global economy, increasing unemployment and leading to a deterioration of the financial health of industries and households. Policy Interventions, Recession fears and pricing uncertaintiesPolicymakers are working around the clock to manage the crisis and its impact on the financial markets and the real economy.Various policy actions underway include:The US Fed has cut short-term interest rates to zero.The Fed and Treasury have taken extraordinary actions to aid market functioning and financial system liquidity. Measures include support for the commercial paper market, asset purchases and tax holidays. Similar extraordinary measures have been taken by global central banks and policymakers including large Quantitative Easing actions by the Fed, ECB, Bank of Japan and Bank of England.Lawmakers in Washington have reached an agreement on a $2 trillion economic stimulus package to support companies and workers harmed by the coronavirus pandemic. |
| Investing strategies for the long-term So amid all this uncertainty, how does one adjust their investing strategy?As we have discussed in our previous mailers, it becomes risky to time the market in these uncertain times to ascertain if the market has bottomed out. However, history has proven time and again that such crises provide extremely good value-buying opportunities.Despite similar crashes in 1987 and the financial crisis of 2008, disciplined investing for the long term has proven to be a winning strategy and has paid off handsomely.The incentives for investors to pursue value investing in the long-term have always catapulted during moments of crises. Be patient. Find value buying opportunities in the current market which has seen significant valuation correction. Invest regularly for the long term and use dollar-cost averaging to your advantage. When investing, it’s important to keep the big picture in mind amidst breaking news and clickbait headlines. Even after a 6% drop in February last week, the S&P 500 was still up 180% over the past 10 years. Here are some market corrections seen in the history of crises: |
As billionaire investor Howard Marks of Oaktree Capital Management puts it:
“The bottom” is the day before the recovery begins. Thus it’s impossible to know when the bottom has been reached … ever. Oaktree explicitly rejects the notion of waiting for the bottom; we buy when we can access value cheaply.
