Market Insight - Don't Panic!
As always is the case when we have a stock market correction, the question is should we send information out or not. For those of you who are concerned, this should help with any fears. With those of you not concerned, we do not want to alarm you by sending this, but to explain as best possible what we see as going on.
- Our view: We have been waiting for a correction in the equity markets for some time now. Over the past months, the markets have continued to rise without that often much needed correction. (A correction is defined as a downturn of 10% or more.) Corrections actually are healthy for the markets since it allows equity prices to adjust and the markets become more efficient. Often the markets tend to overshoot on the upside and do the same on the downside. When the markets do start to correct, many times, it’s due to factors that have been ignored for a while. All of a sudden though, traders wake up one day and decide it’s time and that then feeds off itself until a bottom is found, which then leads to the next upward move. By no means is this a perfect science. In fact, it can be quite the opposite at times. Keep in mind that this is impacting the equity markets negatively. For diversified portfolios that have bonds and cash, the impact is less than what the headlines are saying.
- So what is triggering this recent correction? Well, this is obvious as the fear due to the Coronavirus continues to spread throughout the world. The other part of the concern is the question how bad is this and what are governments doing about it. These are legitimate concerns and the reality is there are no real answers right now. The concern is that this will affect economic growth throughout the world and that leads to lower profits and therefore, lower stock prices. A perfect recipe for a correction in equity markets.
- How bad will this correction be? That is also impossible to know. The pundits will predict all day long and have their reasons why. The bottom line is no one can predict this. Our feeling is that a 10%-15% correction is very possible. Could it be more? Yes, but again, hard to predict. The good news is that the economy, leading up to this, has been in a slow growth stage for quite some time. We have been seeing signs of a slowdown in some areas, but nothing that is out of the normal range and no need to panic.
- What should you do now? They main thing is to not panic. From a financial planning standpoint, you should focus on long-term goals and growth, not the short term. It is never comfortable going through this. Being an election year only adds to all the noise out there. Politicians will point the finger and look to blame others.
- What are we at FAM doing? We continue to monitor the situation and make individual decisions of any needed changes in portfolios. This correction may continue longer than we would like, or not. There may be days or parts of the day where the markets have large gains, but that does not mean we will not see additional sell offs. Traders who trade stocks are people and emotions do get in the way of rational actions often. In the short run, the markets can be irrational, but over time, they tend to be rational and efficient. As an individual investor, the idea is to try to not become emotional about your portfolio. In some cases we may recommend sitting tight, while at other times may recommend adding to equity positions. As a financial planning firm, we look at each client situation and make the appropriate recommendations based on your goals and objectives.
As always, we are here if you have questions or concerns. Panic is not an investment strategy that ever works!