The Coronavirus Part 2: Market Impact and the Path Forward
Last week I wrote to all of you after a historically challenging week in the markets. Through the remainder of the week, markets went up and down and landed about where they had begun. This past Monday brought on another bout of strong volatility with many US market indices losing 7 percent, the largest one day drop since 2008. On Tuesday, the market rallied as investors looked to pick bargains, and today fear of the coronavirus and its economic impact have again sent markets strongly downward.
What Is Happening? The coronavirus’s impact on the economy is rattling markets. Amid these fears, Saudi Arabia and Russia have engaged in an oil price war. Slowing global demand for oil has been hard on oil producing companies and countries. It has reduced prices for oil and subsequently oil revenues. In an effort to reduce supply and provide support for prices, OPEC countries tried to persuade Russia to go along with production cuts (everyone, especially the major producers, needs to reduce production to stabilize prices and issues of fairness arise if the burden is not shared). Russia did not agree to production cuts which prompted the Saudis to retaliate with price cuts of 10%.
Lower Gas Prices Are Good, Right? For consumers at the gas pump, lower oil prices are already showing up at filling stations and this does help drivers and their budgets. However, lower prices on oil result in lower revenue for oil companies and the countries that depend on sales of this resource. Oil companies in Texas and other oil producing states have already started to lay off employees and several dozen companies have gone out of business. Further downward pressure on oil prices could lead to more job losses and additional companies going out of business.
Coronavirus Update. The virus’s infection of new people has dramatically slowed in China, but it is showing a rapid increase in other countries such as Iran and Italy which went from 6,011 cases just a week ago to 22,537 today. Additionally, as infected people initially do not show symptoms, it continues to spread quickly.
What We Are Doing. In reviewing accounts this past week, there have been a few portfolios where it made sense to pick up bargains. As of today, the S&P 500 is down about 24% for the year and international markets are down about 27%. I would expect that as a coronavirus vaccine is not expected for over a year, there may be several opportunities to purchase stock mutual funds or ETFs (exchange traded funds) at attractive prices throughout 2020. I have set targets to pick up stocks as they become cheaper. Note that when stock mutual funds or ETFs are purchased, we are looking to get closer to your target allocation, not to gamble and invest disproportionately over our target in stock funds.
Harvesting Tax Losses. Additionally, for those with significant assets in taxable accounts (non-IRAs), we may sell some investments at a loss to produce tax savings. Of course, when stock prices are down, we want to quickly get back into the market while avoiding wash sale rules which can nullify tax losses. Here is a scenario you may see: we will sell funds at a loss (outside IRAs) and purchase other funds with similar goals, but dissimilar enough to avoid the IRS’s wash sale rules. (Note that the basic idea behind the wash sale rule is that tax losses are disallowed when one buys an investment that has been sold within the last 30 days before or after the initial sell trade.)
The Path Forward. As I mentioned last week, Advitica portfolios were designed to weather market storms. Unfortunately, this doesn’t inoculate portfolios against losses, but it has and should continue to have elements that help cushion the downturn. It may take a year or two for this event to pass, but I expect markets to recover. In the interim, please keep me apprised of your cash needs so I can factor this into your planning. Along this journey I will be watching for opportunities to pick up stock mutual funds and ETFs at cheaper prices and perhaps sell a few with the goal of reducing your tax bill.
Keeping in Touch. With the markets being very volatile, I am watching things closely. Markets close daily at 4 pm ET, 1 pm PT. While the market is open, I may be quite busy looking for opportunities for you. For this reason, if you want to have a phone call, it will be easiest to reach me after 1 pm, Pacific Time. Also, I use video conferencing software to have meetings with clients outside the Seattle/Olympia area. If you are local and want to have a meeting, but wish to limit your potential exposure to others, we can still “see” each other and review documents together using this tool.
