3 Triggers...1 Crazy Ride
Do you remember the movie “The Perfect Storm” released in 2000 starring George Clooney and Mark Wahlberg about the crew of a fishing boat battling against the brutal forces of nature as three separate storms coalesced into one vicious storm? The story seems to be a parable for the – to put it lightly – rough waters we’ve all been swimming in.
The last 8 weeks have been a rather brutal rollercoaster of volatility, with enough big drops and loop-the-loops to make us all feel nauseated. The COVID-19 coronavirus global outbreak has become the context for a series of events – some anticipated and some unexpected – which has disrupted our everyday lives and sent markets reeling. While the coronavirus has become the face of negative events we’re struggling to manage, it is really only “one storm” of three creating this unique and – let’s call a spade a spade – crazy, tempestuous environment.
We think it’s important to remember what life was like at the beginning of the year. Just 3 short months ago – what now seems like another lifetime – markets were at an all-time high, domestic growth expectations were positive, unemployment was at record lows…it seemed as though the glorious bull market we had experienced for the last decade had no end in sight. Yet despite these encouraging metrics, there had been a growing sense of unease – after all, bull markets can’t last forever. To many, it felt as though we were living in a dried field, and a singular match strike could set us all aflame. These skittish investors were waiting with bated breath to proclaim the onset of the next bear market or recession. History has shown the power of such pessimistic thoughts and expectations can often become the impetus for a more damaging reaction to negative events. While these self-prophesizing investors are now likely thrilled to exclaim “I told you so”, that doesn’t necessarily mean they were right.
Our mantra has always been to hope for the best, but prepare for the worst. While we were waving the optimism flag to start the year, we have also been preparing for the day when the markets would change direction.
No one could have predicted the arrival of a new global pandemic, or the violent repercussions left behind in its wake. After all, were it not for the coronavirus outbreak, we could certainly still be marching along to the bull market drums. But that doesn’t mean we weren’t armed for a reversal of market fates. We at Dashboard have always been ready for the next market downturn: we continually monitor and update portfolios to address and adapt to the latest trends; we consistently encourage our clients to rationally evaluate their preparedness for the next inevitable correction; and we continue to stress the importance of fixed income in portfolios. Our mantra has always been to hope for the best, but prepare for the worst. While we, along with many other experts, were waving the optimism flag to start the year, we have also been preparing for the day when the markets would change direction.
At this point, there’s very little we can say which you haven’t already heard 27 times today alone about the impact and spread of COVID-19 coronavirus. The last week of February, just after confirmed cases were being reported in Italy and Iran, we discussed at length All Things Coronavirus focusing on the virus’ impact to China, the US, and the world at large. Much of this discussion continues to be or has proven to be accurate.
Recent measures taken to inhibit the rapid spread of coronavirus here in the US will most certainly cause a slowdown in economic activity and greatly impact many industries in good ways and in bad. Obviously, service-related and travel/tourism businesses will take a hard hit during this time as people remain home and restaurants are advised (or in several states mandated) to close. Meanwhile, healthcare services will be on the rise and retail/online stores selling groceries and basic supplies are overrun with people fighting over the last package of toilet paper.
Markets hate uncertainty, and nearly everything about COVID-19 coronavirus is unknown. As more information comes to light, expect the dramatic volatility to level out.
Ultimately, it is uncertainty about nearly every aspect of this virus that is causing all the hullabaloo. We don’t know how contagious the virus is. We only very recently were able to effectively and efficiently test for it in mass. We don’t know the incubation period. We don’t have an official treatment. We don’t know if our healthcare system can handle the strain of a large spike in confirmed cases. We don’t know if this is a “one-and-done” virus or if it will become seasonal like the flu. We don’t know how long our daily lives will be impacted by the measures taken to curb the spread. The list goes on…
Markets HATE uncertainty, and nearly everything about COVID-19 coronavirus is unknown. As more information comes to light, expect the dramatic volatility to level out.
As a result of business slowdown across the globe, demand for oil has diminished. Typically, this is when the “oil cartel” OPEC lead by Saudi Arabia would rig the market in the favor of its oil-producing member nations to decrease production and more closely align supply with current demand, thereby maintaining or elevating the price per barrel.
Unexpected, mutually destructive actions taken by Russia and Saudi Arabia have caused oil prices to plummet. While this is good for the average consumer at the gas pump, it will likely be harmful to domestic oil producers.
When OPEC approached its partner Russia in early March to agree upon a production decrease, an unexpected and unprecedented, mutually destructive spat ensued. The Russian Energy Minister responded by eliminating production limits entirely, thereby exacerbating the oversupply of oil. The Saudis attempted to strike back, announcing deep price discounts in April to incentivize buyers to purchase from OPEC and not Russia. These actions caused oil prices to plummet. A resolution still evades these parties, and it remains to be seen what the longer-term impact will be.
While a price discount on oil is certainly beneficial for the average consumer at the gas pump as well as companies or industries that require oil to operate, it will likely be harmful to domestic oil producers.
Election years are always controversial and tumultuous. Typically, early in the year while various candidates are duking it out for delegates through the primaries, markets are more volatile. Then, as the nominee is established for each party things generally settle down until we get closer to the election in November. As leaves start to change color, markets tend to get a bit dicey again with uncertainty on the rise about the outcome of the election. All of this is par for the course – it’s anticipated and expected.
Many predicted this election year may be a bit crazier than normal given the highly divided nature of American behavior and sentiment of late plus the newly discovered power of social media to spread ideas much faster than the coronavirus. For better or for worse, we live in a world where a singular tweet or sound bite can set off a rather incredible string of events that always seems to end with the “talking heads” on TV shouting at each other and at you.
Because we are in an election year, the outbreak and spread of this virus has become highly politicized, further exacerbating the expected controversy.
The recent outbreak of COVID-19 coronavirus here in the US has become the latest and loudest context through which the democratic candidates and President Trump are continuing their borderline verbal assault on each other. Unfortunately, because we are in an election year, the outbreak and spread of this virus has become highly politicized, further exacerbating the expected controversy. If this pandemic had emerged mid-term, we doubt there would be as much debate and disagreement about the virus itself and our response to the outbreak.
As these three storms coalesce and feed off of each other, it is easy to allow ourselves to be swept up in the chaos of it all. While the COVID-19 coronavirus is the catalyst setting off various reactions, it is important to understand there are multiple forces at work here, creating and causing the uncertainty that has sent the markets on repeat rollercoaster rides.
While it’s hard to imagine now, eventually this will all get better – we will get the outbreak under control, we will adapt to the evolving oil production environment, and we will get through another presidential election. Life will eventually get back to normal. It may take a bit longer than we would all like, and we may come out the other end with some bumps and bruises…but we will get there.
As these three storms coalesce and feed off of each other, it is easy to allow ourselves to be swept up in the chaos of it all. Take a step back and evaluate the situation logically, not emotionally.
Continue to “Fight the Narrative” – take a step back and evaluate the situation logically, not emotionally. If you can weather the storm for the next few years, then just sit back, relax, and keep an umbrella on hand. However, if this volatility keeps you awake at night, then we should discuss what additional actions you can take to address your concerns and help prevent you from making a costly, emotionally-charged mistake.