Stocks tumbled again on Wednesday, as worries about rising COVID-19 cases and hospitalizations sent investors toward the safe havens of U.S. Treasuries and the dollar. The S&P 500 index fell 3.53%, its worst single-day loss since June.
Every sector lost ground, with Energy, Information Technology and Communication Services faring the worst. The Cboe Volatility Index (VIX) jumped above 40, to near June’s high.
“The economic recovery remains choppy and at the mercy of the COVID-19 virus,” says Schwab Chief Investment Strategist Liz Ann Sonders.
Investors also remain concerned about stalled talks between congressional Democrats and the White House over a potential fiscal stimulus package to support small businesses and consumer spending during the pandemic, Liz Ann says.
Investor optimism had become excessive since mid-October, as well, leaving markets vulnerable to bad news—which happened this week, as the coronavirus pandemic worsened.
“Volatility is likely to remain elevated into Election Day, and even longer if there’s a contested result,” Liz Ann says. “Even absent that scenario, the lack of fiscal relief, coupled with the virus’ impact on economic activity, could put a significant dent in the economic trajectory.”
Global shutdowns roil markets
Germany and France on Wednesday announced renewed restrictions aimed at controlling rising COVID-19 cases. Despite a near-term hit to the economy, the restrictions could boost the longer-term recovery, according to Schwab Chief Global Investment Strategist Jeffrey Kleintop.
Europe’s stronger safety net may also support the region’s recovery, he says. “The combination of furlough and unemployment insurance programs should support households through the end of 2021,” Jeffrey says.
Safe-haven buying boosts Treasuries
U.S. Treasury yields have moved lower during the past week as investors bought Treasuries, worried that the economy will slow without further fiscal stimulus (generally bond prices and bond yields move inversely). Yields for longer-term bonds dropped, with the 10-year Treasury yield falling back from the highest levels since June.
Despite low yields, bonds can still offer benefits, says Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.
“Although yields are near historically low levels, high-quality bonds can offer diversification in portfolios containing more-volatile investments, like equities,” Kathy says.
However, she suggests investors focus on higher-quality fixed income securities, such as Treasuries or investment-grade corporate bonds. Lower-rated bonds are most at risk during an uncertain economic environment.
“Heightened volatility and concerns about economic growth may lead to lower corporate profits, and add to financial pressure on state and local governments,” Kathy says.
What long-term investors can consider now
1. Resist the urge to react to daily market movements. Selling stocks when markets drop can make temporary losses permanent. Staying the course, while difficult emotionally, may be healthier for your portfolio. This doesn’t mean you should hold on blindly, but we suggest taking into account an investment’s future prospects and the role it plays in your portfolio, rather than being guided by short-term market movements.
In practical terms, that means taking a beat and really thinking through why you want to sell an investment. Does the investment no longer fit your strategy—or is fear driving your decision?
At the same time, investors should avoid trying to time the market. This rarely works—but it’s especially difficult to try to time the market around unexpected geopolitical events, like COVID-19. Focus on the time horizon for each goal.
2. Make sure your portfolio is consistent with your goals, risk tolerance, and preferences. “When the market is going up and up, it’s easy for investors to think they’re more comfortable with risk than they actually are,” says Mark Riepe, head of the Schwab Center for Financial Research. “Pullbacks have a way of stripping away any illusions on that front.”
“That’s why it’s so important—particularly for the new investors out there—to have a plan for the money you’ve invested,” Mark adds. “If you’re saving and investing for a goal that is still many years away, then the best response to sudden drops in the market may be not to do anything.”
However, if you’re uncomfortable with market volatility and your goals are short term, you may want to decrease your exposure to riskier assets and move that money to Treasuries or bank certificates of deposit (CDs) to reduce volatility.
3. Rebalance your portfolio as needed. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to review your portfolio for rebalancing opportunities at regular intervals, and is worth considering when markets have been very volatile.
“If you are a disciplined longer-term investor that has a diversified strategic asset allocation plan, you could consider more frequent rebalancing tied to how far asset classes have moved relative to [your] longer-term targets,” says Liz Ann.
Schwab clients can log in and use the Schwab Portfolio Checkup tool, under the Portfolio Performance tab, to assess whether their portfolios are still in balance with their target asset allocations.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
Investing involves risk including loss of principal.
Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.
The policy analysis provided by Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Diversification, asset allocation and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.
Currencies are speculative, very volatile and are not suitable for all investors.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
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