The global financial markets began this week with a sell-off with global equities down more than 7% midday following large declines in oil prices and concerns about the spread of the coronavirus.1 We realize it can be distressing to see this level of market volatility, which can be positive and negative as demonstrated last week. In these times, it is helpful to recall that we have seen other turbulent markets in the past.
The exhibit below features historical periods of volatility and the subsequent recovery from 1970 to 2018. The S&P 500 Index dropped 46% in 2008, and the market recovered. Your portfolio has been designed to not only survive but take advantage of market downturns and financial crises. Thus, it is important to maintain discipline through this volatile period, as the data suggests this discipline should result in long-term growth and value creation for the investor.
At this time, we are focused on rebalancing portfolios to capture returns. Even though equity markets are down, long-term bonds are up about 27% year-to-date.2 It would be imprudent not to take some of those gains off the table and allocate them to equities. This is the definition of sell high, buy low. Just like in 2008, we encourage clients to focus on the long term, and that drops in the market were expected when we put together your long-term plan.
Buried in the press and coverage, there are positives to note for the consumer. First, the price of Brent crude oil, a measurement of oil prices, has dropped from $68.91 a barrel on January 6, 2020 to a low price of $31.02 a barrel through midday on March 9, 2020.3 Oil prices play a major role in the price of gasoline, and consumers can expect to see lower prices at the pump. Second, the drop in long-term bond yields correlates with historically low mortgage rates. If you have a mortgage, it may be prudent to look at your current interest rate and evaluate refinancing. Third, methodically investing capital over time will capture dollar cost averaging during this period of volatility. Dollar Cost Averaging allows an investor to put money into the market at these cheaper prices while reducing the point-in-time risk of investing everything at once. It can be a great strategy to reduce volatility and regret when putting more money to work. Finally, it is our observation that the U.S. banking system is in a significantly better position presently than in prior financial crises.
Over the past 35 years, Forum partners and advisors have been through many periods of global volatility. We recognize that such periods are never easy to go through. In these situations, the only thing you can control is your behavior and realize that making a decision that does not conform to your long-term plan will often lead to poor outcomes.
Our most important job is to keep clients disciplined in a globally diversified portfolio to help them achieve their financial goals, so they do not have to continually focus on their portfolio. It is more important to concentrate on staying healthy and keeping your family well.
1 Claire Ballentine and Vildana Hajric, “Stocks Slump Most Since 2010 With Oil in Free Fall: Markets Wrap.” Bloomberg, Updated March 9, 2020.
2 Long-term bonds as proxied by iShares 20+ Year Treasury Bond ETF. The proxy tracks investment results of the ICE U.S. Treasury 20+ Year Bond Index.
3 Brent Crude (ICE) Generic 1st ‘CO’ Future, Bloomberg, March 9, 2020.