Market Pullback Update
The S&P 500 high earlier this year was 3393. The S&P closed yesterday at 3128, a 265 point drop equaling a percentage drop of approximately 7.8%. The Index is now down (3.17%) Year to Date in 2020.
Why the Market Pullback
Last year the overall United States Stock Market rose approximately 30%. Why did the market move aggressively higher last year? A little perspective; the last quarter of 2018 saw the S&P 500 drop by over 13% as our Federal Reserve Chairperson stated he intended to raise rates indefinitely. What was he thinking? Can you imagine if that actually happened? Everything would be that much more expensive. Car loans, leasing, mortgage rates and Corporate and Government borrowing would all cost more. This would have had a profound impact on the economy and markets. In January of 2019, our Federal Reserve reversed course saying we do not need higher rates and then proceeded to lower rates during the year leaving investors very confident that rates will stay low for longer. The market went up significantly from January through April on that news and then the trade talks with China weren’t going well so the market paused.
Once it was reported a trade deal was imminent the market propelled to new highs, ending 2019 up 30%. With a signed trade deal, market participants believed US Corporations would again start spending on new projects which would increase corporate profits by approximately 10% in 2020.
In my opinion the US stock market became over-valued and in need of a pullback in November 2019. The Coronavirus is the perfect excuse!
The Coronavirus is certainly a very serious issue for investors to pay attention. We do not know how much of an impact this will have on the Global Economy. We do know that initially it will lower first quarter GDP numbers around the world. Assuming the virus is contained and as all prior have been, the economy could accelerate later this year making up for the loss of economic activity now.
Just think about it for a second. If you’re a US company with a factory or operations in China and you’re shut down for 2 or 3 weeks, you will be subtracting revenue as usually you operate for 52 weeks. This impacts companies that supply you parts, products, raw materials and the companies that supply them. When all is back to normal you typically have pent up demand that increases activity often making up for lost time although certainly no guarantee.
My biggest concern at this moment is not the market pullback, however the amount of massive information available from so many different sources. This information is filled with significant bias, the strong desire for ratings and often from people who lack experience, expertise and wisdom. When enough people take the bait, they start liquidating investments sending the markets much lower than deserved. This self-fulfilling prophecy is my current short-term concern.
I love when I hear, “what should be your first trade of the day?” This makes investors feel as though they should be trading daily. This works if you make a living as a Trader however not for the rest of the world…..
Expected, Do Not Panic (If Properly Diversified)
With a 30% US Stock Market gain in 2019 and so far a 3.17% pullback in 2020, we should absolutely not panic.
Historically the market has a handful of 5 to 10% pullbacks each year, and we’ve gotten a bit complacent thinking everything must go up all of the time.
If you believe your portfolio is properly positioned based on your cash flow needs and time horizons, relax…. but pay attention. I certainly will do both!