Stock Market Drop and What You Should Do
Global capital markets experienced significant volatility last week and officially tipped things into a “Bear Market” situation. Key developments included:
- A continued rise in coronavirus case counts, particularly in Italy (which has now expanded travel and activity restrictions country-wide) and most recently the USA.
- A marked drop in oil prices after Saudi Arabia and Russia couldn’t come to an agreement on production cuts as a response to lowering demand due to coronavirus concerns.
- Government bond yields dropping to all time lows.
- Stock markets dropping sharply lower most of the week – though stabilizing a little bit on Friday.
While the week was a tough one, it’s important to note that the volatility is in reaction to a health issue, and not to any underlying economic, financial or political crisis. A major market event can be Endogenous or Exogenous and it’s important to understand the difference in implications.
An Endogenous Event originates in a financial model like the 2008 financial crisis and we typically try to use fiscal tools and stimulus to aid recovery.
An Exogenous Event is determined outside of a financial model. While fiscal tools don’t work as effectively, they are normally of shorter duration.
So, what should you do? The WWII poster created by the British with the words “Keep Calm and Carry On” comes to mind. We’re continuing to advise investors to stay invested, stay focused on their long-term objectives and stay disciplined.
It is no doubt troubling to see the wild swings in the markets, but you need to stay rational and keep the “human emotion element” out of your financial decisions. If you feel like you need to do something, I’ll suggest these things to you:
1) Try to remain calm. Seeing that this is an Exogenous Event, the underlying financial fundamentals will prevail. Hopefully you already have a globally diversified portfolio that’s in line with your risk tolerance which means you don’t need to adjust a thing.
2) Stop to evaluate your own situation. Unless you’ve recently lost your job, developed a sudden life-threatening illness or have otherwise materially changed your situation, your financial plan shouldn’t need to be changed.
3) Third, stick to fundamentals. The old saying of “buy low sell high” needs to be remembered. If you have some un-invested money sitting on the sidelines, this might be a good time to buy.
While this is a time of uncertainty, we do know that equity markets have a history of volatility, but that stock markets go up over time. In fact, markets are up over 70 per cent of the time and many of the strongest growth periods immediately follow market drops.
We also know that trying to time the market is difficult and that, at times like these, it’s those who continue to stay invested who are best positioned for long-term success.
*Please note that this article is not intended to be personalized investment advice as that is impossible to provide without knowing your entire financial situation and current portfolio holdings. I would be happy to refer you to a licensed investment advisor that I trust if you’d like to receive customized recommendations.