February 27, 2020
Tagged As: Wealth Management
The Economy and Market from Here...At Hills:
How the Coronavirus has Effected Stock Markets
News regarding the increased spread of COVID-19, also known as the coronavirus, to countries outside of China has ramped up fears among investors as the uncertainty on the global economic impact heightens. In response to the recent market volatility, we at Hills Bank would like to offer perspective on recent market behavior.
On Monday, the S&P 500 Index experienced its largest decline since February 2018, closing down 3.3%. This decline continued Tuesday resulting in a two day drop totaling nearly 6.5%. Many headlines are warning investors that the market is approaching correction territory. To put things into perspective, the last market correction was in December 2018 due to expectations for slowing GDP (global gross domestic product) growth due to tariffs between the United States and China and a still tightening Fed Funds rate. In all, the market dropped 19.8%.
Some may say a result of the strong market performance during 2019 and into the first several weeks of this year that a market correction is long overdue. Though one cannot predict when market pull backs will occur or what the catalyst may be, historically a 10% decline or more in stock prices, what is referred to as a correction, occurs every 34 weeks. Corrections are normal and should be expected from time to time. In our experience, long-term investors should always stay the course. Patient investors were rewarded for doing just that following the 2018 decline as market have rallied more than 35%.
Our customers will be happy to learn that beginning in January we have been actively trimming equity as a result of such strong markets prior to the most recent drop in prices. This action has rebalanced our customers to our targeted asset allocations after what was a fantastic 2019 and strong start to 2020. We continue to slightly favor stocks over bonds because revised expectations still point to economic growth – albeit at lower levels due to the impact of the coronavirus. In addition, yields for bonds are considerably lower than those of stocks – the 10-year Treasury bond yield is less than 1.4%, while the S&P 500 index dividend yield is 1.8%. This income disparity should serve to support stock prices at current levels.
We continue to believe that major asset allocation decisions, the mix between stocks and bonds, should be based on long-term considerations such as time horizon and risk tolerance and not short-term market events. We also understand that current market conditions can be unnerving.
Please know, we are always available to answer any questions on your specific account(s) and help refocus perspective to your individual situation and away from any news of the day – no matter how negative or positive.
Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.