Magazine

What to Know About the Recent Market Drop

By Sylvia Kwan

This week, the markets saw several sharp drops in stock prices, while US Treasury bond yields dropped to historic lows, as investors have moved out of stocks to the relative safety of bonds.

These movements were mainly driven by events: the spread of the coronavirus, the quarantine of 17 million people in Italy, travel restrictions implemented by the US, and a steep decline in oil prices to their lowest levels since 2016.

So what happened this week?

Last weekend

There was a clash between Saudi Arabia and Russia. The two countries, both large oil producers, couldn’t agree whether to cut oil production in response to the slowdown in demand (mainly from China) resulting from the coronavirus. So instead of cutting production, Saudi Arabia ramped up production and slashed prices instead. This increases supply, and prices dropped sharply. It’s being seen primarily as a political move, rather than being solely driven by weakened demand. (Meanwhile, Russia said it could also lift its own output, so a price war may be ongoing.)

Monday, March 9

It’s often said that markets hate uncertainty. On Monday, the oil uncertainty added to the coronavirus uncertainty, and the result was near-panic in the equity (aka stock) markets. It was so much so that market “circuit breakers” — or automatic halts on trading that kick in when the markets decline by certain amounts — paused trading for a period of time. The S&P 500, an index of companies that’s often seen as a mirror for the overall markets (along with the Dow Jones Industrial Average and the NASDAQ), fell 7% from its previous close at the beginning of trading that morning. That triggered a 15-minute trading halt across all markets. Then they resumed trading as usual.

Trading halts give investors the time to pause and process, as they have a tendency to sell now and ask questions later during times of volatility and scary headlines. They also give everyone time to check to make sure the markets are operating the way they should be and there’s been no interference or technical issues.

Wednesday, March 11

On Wednesday, the World Health Organization officially declared the coronavirus a “pandemic,” meaning it has effectively spread across the whole world. The Dow Jones Industrial Average closed down more than 20% lower than its most recent high, and the S&P and the NASDAQ closed just shy of that. A drop of 20% is also known as a “bear market,” which is often seen as a sign of continued uncertainty to come. Really, though, all we know is that it’s a signal of uncertainty right now.

Wednesday night, in an effort to contain the coronavirus, President Trump announced a 30-day ban on travel from Europe to the US (excluding the UK) and advised people against traveling abroad. Other countries are expected to follow suit. He also said that the administration is considering a payroll tax cut, pushing back the April 15 tax-payment deadline, and a $50 billion in funding for low-cost loans to small businesses affected by the outbreak. That’s meant to help ease the predicted economic effect of the virus.

Thursday, March 12

On Thursday morning, the S&P 500 dropped by 7% again, tripping the circuit breaker and placing another 15-minute halt on trading. Later, the Federal Reserve announced a plan to inject money into the bond markets, but the stock markets were down even further by the end of the day. The Dow fell by 10% (its biggest drop since 1987), the S&P 500 fell by 9.5%, and the NASDAQ fell by 9.4%.

Some perspective

We still don’t know how the coronavirus will play out — nor does anyone. Markets may remain bumpy for some time until there’s news of progress. This type of volatility is uncomfortable, but it is also to be expected. Looking at the stock markets over the last few days, as well as those historically low bond yields, it’s clear that we are already seeing a sharp slowdown in economic activity. There’s less travel, less manufacturing, less consumer demand as governments around the world encourage social distancing.

What we don’t know is how long it’s going to last, and that uncertainty is driving the volatility in the markets. All in all, some economists have said they do expect growth to rebound, although it may take until later this year.

Here are a few things to keep in mind:

In China, where the coronavirus originated, there’s already been a steady decline in new cases.

This suggests that the coronavirus’s spread may have peaked there, and transmission is slowing. That could mean that what were seen as extreme measures at the time — lockdowns, canceled public gatherings, etc — is working. The temporary travel ban announced last night, and the other severe and scary measures being put in place, exist in order to help contain the virus and prevent further spreading about the world.

The 2008 bear market was made so much worse because the banking system was highly leveraged. Banks today are in better shape than they were then.

Bank credit risk is nowhere near the place it was in 2008, and large banks aren’t as heavily leveraged, which means that big banking institutions should be able to weather a crisis better than they could then. And the markets are functioning as normal — even with this volatility.

The Federal Reserve (and other central banks) have tools to help in times of crisis.

They’ve already lowered interest rates once since the coronavirus began impacting the stock markets, and are expected to do so again. The Fed also increased those bond purchases, plus the number of short-term loans it offers banks to keep cash flowing smoothly. Other nations’ central banks, including the Bank of England and the European Central Bank, have taken emergency measures, too. The goal here is to keep markets functioning well while the coronavirus uncertainty remains.

The most important perspective: Have a plan.

If you’re investing for a short-term goal with a portfolio like the ones we create for you at Ellevest, you will have less exposure to equities (aka stocks). That’s because we plan around possible market volatility, and when you get nearer to needing your money, we shift the mix of investments in your portfolio to lower your risk. And if you’re investing for the longer term, you have time on your side to recover from this and whatever comes in the future.


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Sylvia Kwan

Dr. Sylvia Kwan is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios and develops the algorithms behind Ellevest’s investment recommendations.