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Insights on Recent Market Volatility

Steve Schmidt - Financial Advisor, Arden Hills MN

We know that no matter how calm you are, no matter how long term an investor you are, no matter what your horizons, when the market is jumping around, you feel uncertainty.

Ballast Advisors Wealth Advisor and Partner Steve Schmidt offers some helpful insights for you to better understand how recent events and market volatility may impact your investments. Schmidt is the Chair of the Investment Committee for Ballast Advisors Advice and Wealth Management services.

 

Hang On! Volatility is here for a while

Russia’s invasion into Ukraine has rattled global markets. The S&P 500 Index, which has been under pressure in recent weeks due to rising inflation concerns, reached correction territory last week. Down -11% for the year at one point, the index has recovered slightly as news emerged that Russia and Ukraine may hold talks in Belarus.

As the table below shows, during historically significant geopolitical events, stocks commonly falter for a short period of time before recovering to prior levels.

Trust in diversification

When markets decline, your portfolio results will often vary if you’ve invested money across different baskets of asset classes like stocks and bonds. Diversifying, or distributing your money across investments, is key to reducing investment risk and smoothing the ride through a tumultuous market. Diversifying helps ensure your investments (eggs) aren’t concentrated in one type of asset (basket). So, if one stock or industry has a bad day, your other investments may help offset those losses.
 

Focus on the long term

When the stock market declines, it can be difficult to watch your portfolio’s value go down and do nothing about it. It’s normal to feel pessimistic after reading or watching the latest news, but if you’re investing for the long term, doing nothing is often the best course of inaction. 
It’s important to remember that when you sell investments in a downturn, you lock in your losses.
Take the February 2020 COVID-related market crash. An investment of $10,000 in an exchange-traded fund (ETF) that tracked the S&P 500 would have lost more than 30% or $3,000 of its value during the spring 2020 crash. If you’d had sold, you would have locked in that $3,000 loss. Those that held through the downturn, would have recovered from the downturn by August, with additional growth by the end of 2020 and beyond.  
Focusing on the long-term is often best. If you have questions about your portfolio or the markets, don’t hesitate to call Ballast Advisors.  

Ballast Advisors is a fee-based financial planning firm.  Our financial advisors serving the Twin Cities and Southwestern Florida can help you reach your retirement and financial goals.  Our offices are located in Woodbury, MN, Arden Hills, MN and Punta Gorda, FL.

What does the economic impact of the novel coronavirus (COVID-19) mean for your financial plan?

This is the question many individuals and families are asking in today’s uncertainty. Aside from the obvious concerns for the health and safety of the community, market volatility is stressful and economic slowdown may be hard on business owners and employees as we navigate this pandemic as a society.

Ballast Advisors, a Registered Investment Advisor (RIA) and fiduciary firm based in the Twin Cities, guides individuals and families to achieving their goals using financial planning and time-tested investment strategies.  We caught up with Managing Partner Paul Parnell to have him answer a few frequently asked questions during this period of financial uncertainty and anxiety.

Will this recession last?

Steep declines in the stock market have often coincided with a downturn in the economy. There are still many unknowns, but since World War II, 9 out of the past 12 Bear markets have resulted in recessions, defined as the market dropping 20% or more from its peak.

“It’s reasonable at this time to prepare for a longer-term recession,” says Paul Parnell. “It is hard to keep emotions out of it, but there are smart steps that you can make now to stay financially sound.”

Should I throw in the towel?

Panic selling or “capitulation” is what you begin to see in these uncertain times, but it is important investors understand some key points.

“If you have a solid financial plan, you’re already prepared for this ahead of time,” says Parnell. “At Ballast Advisors, we work with our clients to have balanced and diversified investment portfolios and we help to mitigate risk depending on our client’s age and stage of retirement. Generally, most people gradually reduce risk as they approach retirement.”

Of course, a diversified portfolio is no guarantee that you won’t suffer volatility, but long-term strategies are based on the idea that financial markets are historically cyclical.

“We start to see very high emotions in times like this, and people are tempted to throw in the towel,” says Parnell. “And while it’s very difficult to watch, capitulation can be a detriment for your entire portfolio. For example, after the lows of 2009 recession we saw markets increase 45-54% from the bottom. If you miss this opportunity, it may impact you forever.” 

What changes do I need to make in spending or saving?

In addition to your long-term investments, Ballast Advisors suggests this is a good time to review your budget.

“Discretionary expenses are the first ones to go,” says Parnell. “If you don’t have to reduce savings, don’t.”  Keeping with the philosophy of buy low and sell high, Paul adds, “Try to increase savings, as long as you have the proper cash reserve.”

With the mandated shutdowns, Ballast Advisors suggests you save money on travel, activities, dining out, and similar activities. You may also find savings by negotiating new rates on services, as companies may rather keep you as a customer than lose your business.

“Typically having 3-6 months, salary in cash reserve is recommended. If you are dealing with uncertainty with unemployment, you should increase that to 12 months,” he says. After that is established, Parnell recommends looking at opportunities to increase long-term investment savings.

“Market downturns are generally temporary.  You stand to make money on dollars you invested in a downturn,” says Parnell. “We saw it happen after 9-11 and in 2009. If you’re a retiree, and you supplement income from your investments, cutting your current distributions can make a big difference when markets recover.”

Emotions and Money

“I love Warren Buffet’s quote on the stock market and investing: ‘Be fearful when others are greedy and greedy when others are fearful’,” says Parnell. “You cannot tie emotions to decisions about money.”

Anxiety levels are high for all investors currently. But it’s important to keep perspective, and he suggests limiting your exposure to media that tracks the market volatility daily. 

“I cannot emphasize that enough to clients, I’d be a nervous wreck if I watched the markets on TV all day, and I am in this business,” he remarks. “We believe in staying well grounded.”

These times are hard, no doubt, however, this is the reason you do financial planning, to plan for the uncertainties in life.  This has worked in the past and it will guide you in the future.

“If you are looking at retirement in 5-10 years, you should be looking for a financial advisor, it’s critical,” says Parnell. “Your portfolio should begin to match what it will look like in retirement.”

For more information on how Ballast Advisors helps clients with personal financial planning, executive benefits, and saving for retirement, see www.ballastadvisors.com/.

 

 

IMPORTANT DISCLOSURES

The opinions expressed are those of Ballast Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.

Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.

 

Bear Markets Come and Go

If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical.

The longest bull market in history lasted almost 11 years before coronavirus fears and the realities of a seriously disrupted U.S. economy brought it to an end.

If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical. There have been 10 bear markets (prior to this one) since 1950, and the market has recovered eventually every time.

Bear markets are typically defined as declines of 20% or more from the most recent high, and bull markets are increases of 20% or more from the bear market low. But there is no official declaration, so in some cases there are different interpretations regarding when these cycles begin and end.

On average, bull markets lasted longer (1,955 days) than bear markets (431 days) over this period, and the average bull market advance (172.0%) was greater than the average bear market decline (-34.2%).

*The intraday low marked a decline of -20.2%, so this cycle is often considered a bear market.

The bottom line is that neither the ups nor the downs last forever, even if they feel as though they will. During the worst downturns, there were short-term rallies and buying opportunities. And in some cases, people have profited over time by investing carefully just when things seemed bleakest.

If you’re reconsidering your current investment strategy, a volatile market is probably the worst time to turn your portfolio inside out. Dramatic price swings can magnify the impact of a wholesale restructuring if the timing of that move is a little off.

A well-thought-out asset allocation and diversification strategy is still the fundamental basis of good investment planning. Changes in your portfolio don’t necessarily need to happen all at once. Try not to let fear derail your long-term goals.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical.

The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary. Source: Yahoo! Finance, 2020 (data for the period 6/13/1949 to 3/12/2020)

 

 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice

 

The Coronavirus and the Global Economy

As of February 26, 2020, the death toll from COVID-19 — the official name of the coronavirus first reported in Wuhan, China — passed 2,700, while the number of confirmed cases exceeded 80,000. Almost all were in China, most of them in Wuhan and the surrounding Hubei province. But more than 2,500 cases, including 46 deaths, had been reported in almost 40 other countries. A surge of cases and deaths in South Korea, Italy, and Iran caused new concern that the virus may be difficult to contain.1

Cities under lockdown

By mid-February, at least 150 million people in China were under restrictions affecting when they could leave their homes, and more than 760 million — about 10% of the world’s population — lived in communities under some form of travel restriction.2 Most global airlines cancelled service to and from China, disrupting tourism and business travel.3 The Chinese government enacted restrictions around the time of the Lunar New Year celebration, during which many businesses were closed, lessening the immediate impact. However, as factories and other businesses remained closed after the holiday, the loss of Chinese production and consumer spending began to take a toll on global businesses.4

Lost supply and demand

Many U.S. technology companies have manufacturing operations in China while also selling to Chinese businesses and/or consumers. Companies with substantial exposure to the slowdown in China include big tech brands such as Apple, Dell, Hewlett Packard, Intel, and Qualcomm, as well as many smaller tech businesses.5-6

Vehicle manufacturers throughout the world rely on Chinese-made parts, and many have plants in China. General Motors (which sells more cars in China than in the United States), Ford, Toyota, BMW, Honda, Nissan, Tesla, and Volkswagen all suspended operations in China, while Hyundai and Renault closed plants in South Korea, and Fiat Chrysler closed a plant in Serbia, all due to parts issues.7-9

Global retailers including Apple, Ikea, Levi Strauss, McDonald’s, KFC, and Starbucks temporarily closed stores in China.10-11

In addition to disruptions in the global supply chain and Chinese consumer market, the tourism industry in the United States, Europe, and other Asian countries may be hard hit by the absence of Chinese tourists. One estimate suggests a loss of almost $6 billion in U.S. airfares and tourist spending.12

Although it is too early to measure the full effect on global business, a private report released on February 21 indicated that U.S. business activity had slowed in February to the lowest level in six years, with the biggest hit to the service sector, where travel and tourism are major components. The report also indicated a sharp drop in Japanese business due to lost tourism and export orders. Exports were down in Germany, but the initial impact on the eurozone was minimal.13

Oil pressure

China is the world’s largest importer of crude oil, and Wuhan is a key center of its oil and gas industry. The prospect of lower demand drove oil prices into bear-market territory — defined as a drop of 20% from a recent high — in early February. Prices rose later in the month but dropped again with news that the virus may be spreading. Natural gas prices have also been hit by the prospect of lower growth in Asia. While lower prices may be good for U.S. consumers, oil-exporting nations, including the United States, will face lower revenues, and energy companies that are already on rocky ground may struggle.14-17

Market reaction

In late January, the Dow Jones Industrial Average lost 3.7%, due in large part to concerns about the virus, wiping out gains for the year.18 The market bounced back quickly and set new records in February, but weak business news and a rash of cases outside of China sent it plunging, with a loss of almost 8% from February 19 to 25.19-20 This suggests that the market may be volatile for some time and that future direction might depend on the progress of disease control and emerging information on the impact of the virus on U.S. and global businesses.

See Related Post: Eleven Ways to Help Yourself Stay Sane in a Crazy Market

Global growth outlook

Anything that affects China, the world’s second-largest economy, can have a powerful ripple effect around the globe. An early February report by Moody’s Analytics estimated that every 1 percentage point reduction in China’s real gross domestic product (GDP) will reduce global GDP outside China by 0.4%. The report projected that disruption caused by the virus would cut more than 2 percentage points off China’s GDP growth in the first quarter of 2020 and result in a loss of 0.8% growth for the year. This in turn would cause a loss of about 0.3% in annual global GDP growth outside China and about 0.15% in the United States. Moody’s lowered its projection for 2020 global growth from around 2.8% to 2.5%.21

In a February 16 forum, Kristalina Georgieva, managing director of the International Monetary Fund, was more optimistic, suggesting that the virus might shave 0.1% to 0.2% off the IMF’s 2020 global growth projection of 3.3%. Georgieva cautioned that there was still a “great deal of uncertainty” and emphasized that the economic damage depends on the length of the disruption. If the disease “is contained rapidly,” she said, “there can be a sharp drop and a very rapid rebound.”22

The immediate concerns are to combat the virus on a human level and normalize business activity, but the outbreak could accelerate the shift of U.S. and European manufacturing away from China, creating a more diversified global supply chain.23-24  The situation remains in flux, so you may want to keep an eye on further developments.

All investments are subject to market volatility and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

1) South China Morning Post, February 26, 2020

2) The New York Times, February 18, 2020

3-4, 21) Moody’s Analytics, February 2020

5, 23) The Wall Street Journal, February 18, 2020

6, 10) Los Angeles Times, February 4, 2020

7) Forbes, February 12, 2020

8) Car and Driver, February 4, 2020

9) The Wall Street Journal, February 14, 2020

11-12, 14-15, 18) The Wall Street Journal, February 3, 2020

13) The Wall Street Journal, February 21, 2020

16, 20) The Wall Street Journal, February 25, 2020

17) The Wall Street Journal, February 7, 2020

19) The New York Times, February 20, 2020

22) Bangkok Post, February 17, 2020

24) South China Morning Post, February 18, 2020

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice.