Global capital markets experienced enormous volatility during the first quarter, as the coronavirus pandemic developed through late February and March. The market’s reaction to the pandemic has been remarkable and, in some respects, unprecedented. Historically, examining volatility at the daily return level, only a few episodes during the Great Depression and the 1987 stock market crash are comparable to what we experienced in late Q1. There were more intraday moves of more than 2.5% in March 2020 than in any month since 1900.
Media coverage of the pandemic and the policy response has also been unprecedented. The University of Chicago’s Booth School of Business found that “we’ve had about 16-18 jumps that next-day newspaper accounts attribute to either the economic fallout of the pandemic itself or the policy responses to the pandemic. We’ve had nothing like that previously.” It’s difficult to know how much the media response contributed to market gyrations, but it certainly stoked fear among some investors.
Two other factors are important and likely play a larger role in the market’s response. First is the interconnected nature of the modern world economy, affecting both global supply chains that impact vulnerable just-in-time delivery systems. Second is the disruption of travel and face-to-face personal and business services.
On the other hand, we have witnessed a tremendous policy response, both from public health and economic perspectives. Central banks around the world have acted quickly to provide additional liquidity and governments have responded with aggressive fiscal support. All these measures are outside the bounds of previous experience.
Late last year, we received an invitation to speak to the local chapter of a global network of high net worth investors. One of the questions that they prepared, which we found to be a little humorous, was what is the next “black swan” event and how should we prepare for it? A “black swan” event is, by definition, an event that is a complete surprise. But, just because we can’t predict the exogenous trigger to the event, we can understand the volatile nature of equity markets and how to incorporate that into a financial plan. Our stress-testing of plans includes looking at the outcome if the client had retired in 2007, just prior to the 2008 financial crisis and subsequent “Great Recession”. And, I’m happy to report that the plans that showed strong results in these simulations continue to show a strong probability of success today.
At the close of every previous commentary, I’ve urged you to work with your advisor to have a plan in place. If you haven’t done it yet, now is the time. Please feel free to contact us.
View our Q1 2020 Market Review.
J. Brent Everett
Chief Investment Officer
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