A note about recent market volatility

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

02/24/20

Despite setting record highs last week, US stocks continued their late-week pullback on Monday, with the S&P 500® dropping around 3% within the first hour of trading as investors weighed the potential impact of the coronavirus outbreak

Why the volatility?

The latest bout of market turbulence comes on the heels of reports of growing cases in South Korea and Italy, igniting fears of a genuine pandemic. Several companies have now issued warnings that the outbreak will likely have a negative impact on future earnings. However, the Federal Reserve, while acknowledging the risk posed to the global economy, cautioned it’s still too early to speculate on whether the US will be materially affected.1

The Dow Jones Industrial Average fell nearly 1,000 points on Monday morning, erasing its gains for 2020. The S&P 500 had fallen around 5% from its February 19 high in early trading, while US small caps and international equities were also seeing significant downdrafts. 

Market volatility not unprecedented

Wide price swings are never comfortable, but investors should bear in mind that market volatility of this magnitude is a common occurrence. 

For reference, since 1990, the S&P 500 has had around 150 three-day declines of at least this size (or larger).2 In fact, last year’s July–August down move was roughly the same size. In other words, the scope of today’s sell-off is not all that unusual.

As always, market volatility should be viewed within the broader context of economic trends and a long-term approach to investing.

Key points for investors to bear in mind:

  1. Market conditions can change quickly: The US market experienced three corrections of at least 5% in 2019. Investors considering trying to time a recovery should be reminded that in all of those cases, the market recovered quickly and stocks finished the year near all-time highs. While past performance is never an indication of future results, staying invested may likely be the more prudent course of action for investors with long-time horizons.
  2. US economic fundamentals are sound: Just last week, US Federal Reserve Chair Jerome Powell reiterated solid underlying economic fundamentals, naming strong labor markets, rising incomes, and healthy household balance sheets.1 
  3. Valuations are reasonable: The S&P 500 hit a new record high on February 19. Although forward price-to-earnings multiples are slightly above historical averages, they aren’t necessarily approaching levels seen in past market bubbles.
  4. Maintain a long-term perspective: Investors with long-term investment horizons shouldn’t be surprised to see heightened market volatility, and long-term investment decisions shouldn’t be influenced by headlines of the day or periodic near-term volatility. 
  5. Diversification is key: Diversified portfolios are constructed for market disruptions such as these. Portfolios with a broad range of uncorrelated asset classes can potentially help buffer against market volatility. In particular, equity-focused investors may wish to take a closer look at high-quality fixed-income holdings, which can provide portfolio ballast and could be well-positioned if interest rates continue to fall. 

While near-term bouts of market volatility can be unnerving, they also create opportunities to reassess individual risk tolerance and underscore the importance of a diversified long-term investment approach.

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  1. The Wall Street Journal, “Fed Watching Risks of Broader Coronavirus Disruptions,” February 11, 2020, https://www.wsj.com/articles/federal-reserve-monitoring-coronavirus-outbreak-and-risks-for-broader-disruptions-11581427827
  2. Based on daily price data, 1/1/1990–2/24/2020. Supporting documentation available upon request.
Mike Loewengart
Managing Director, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Managing Director of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Senior Director, Investment Strategy, E*TRADE Capital Management, LLC

Andrew Cohen is the Senior Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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