| wealth management  by Brad M. Weafer, CFA Chief Investment Officer

Significant volatility continues to grip the world’s financial markets. The coronavirus outbreak and its impact on the economy continues to weigh on sentiment. The number of confirmed cases outside of China tripled week-over-week. Investors have begun to assess the potential for weaker consumer demand; weighing on growth. To compound matters, oil prices plunged after OPEC failed to strike a deal for production costs which prompted Saudi Arabia to slash its oil prices and increase production. The drop in oil prices has roiled credit markets and presents another risk for the industrial economy. With the risk of recession rising, stocks fell precipitously Monday, even triggering a temporary trading halt on the New York Stock Exchange. Per usual, fixed income has served its important purpose, limiting risk with treasury yields falling to record lows and driving bond prices higher.

The economic consequences of the coronavirus and an oil price war are real, and it is normal for markets to attempt to discount the risk. However, equity markets have a tendency to overshoot the fair value in these types of “panic” like moments. Many indicators we track suggest the recent price action has reached extremes and the market is oversold. Looking at history, scary headline events happen with an unfortunate regularity (see table below). Given enough time, however, markets find their footing and recover. This doesn’t assuage anxiety at the time, but it is an important reminder that volatility can and does pass and a long-term mindset is crucial. Selling stocks in fear is a recipe for poor outcomes.

 | wealth management

While we don’t advocate rash reactions, we do advocate thoughtful and proactive management. We have noted a number of increasing risks to equities over the better part of the last two years. In response, we have made a number of changes within portfolios to better protect returns to downside shocks. For example, we have already reduced our holdings in the banking sector and eliminated our limited exposure to oil and gas producers in the past year. Volatility begets opportunity in individual companies that may be suffering indiscriminately. We are constantly monitoring our companies and searching for the best opportunities in our investment universe. Our approach is working, our equity strategies have done as they are designed, outperforming standard benchmarks on the downside and limiting losses for clients. Diversification across assets classes is also proving valuable, with positive bond returns offsetting losses in equities. While outperforming on the downside might seem a pyrrhic victory in the short-term, it is the best way to compound long run returns and we suggest clients stick with their strategic plans. 

Market Commentary Disclaimer: This publication is for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information contained herein is the opinion of Boston Financial Management and is subject to change at any time based upon unforeseen events or market conditions.