Making Sense of the Latest Market Rout


Oh boy, what a (market) roller coaster ride we have been on this week! This is not the planned topic for my February blog post. But in light of what has been happening in the market since this past Monday, I felt like pitching in with my own two cents and try to make sense of this stock market “carnage”. Even if you are someone who doesn’t pay attention to stock market daily, you probably have learned the recent market rout that has been going on for the past four days here in the States and beyond. To give you a sense of how bad the sell-off is, let’s look at it in a historical perspective. “S&P drops 10% in six days, fastest correction in history,” says one online financial news website. “US stocks slide into correction, on track for the biggest weekly loss since 2008” says another well-known financial newspaper. Sensational headlines abound.

As I am writing this article on Friday morning, Dow lost another 1000 points at one point. Though no one knows for certain how soon this sell-off will end, plenty of venerable news sources point to the coronavirus outbreak as the major culprit of this adrenaline rush market sell-off. The news reporting about the coronavirus outbreak in China has been going on for over a month, and the market participants are well aware of this and seemed to have shrugged it off. Then, why, all of a sudden, the market seems to be panicking about this coronavirus outbreak? Just last week we had market record highs. Is the coronavirus outbreak the only reason that has caused this stock market stampede? This advisor does not think so. There had been flashing warning signs throughout 2019 already: twice inverted treasury yield curve; continuing decline of US manufacturing activities; the credit crunch in the repo market at the end of 2019, and US stock market valuation that well exceeded its historical average.  Given the US stock market’s gravity-defying stellar performance in as late as of January 2020, this late stage bull market needs great fundamentals to sustain such high valuation. In my December 2019 article titled “A Look into Year 2020”, I mentioned that there could be two potential disruptions to the world economy and market in 2020: disruption of world supply chain and US presidential election. What a coincidence that during the weekend right before Monday, February 24 market first plunge, news broke out that Italy and South Korea were hit hard by the rapid spread of coronavirus, which means the world supply chain could be disrupted even further. At the same time, America learned that Senator Bernie Sanders won the Nevada caucus, thus unofficially put him as Democrat’s front-runner for the party’s presidential nominee. All of a sudden, the market realized that the narrative has changed from business as usual to this could go even worse. 

What is happening right now taught us several things. One, there is no such thing as this time is different for the market. Two, fundamentals do matter. Three, bubbles will pop. Sound familiar? But, when irrational exuberance is abundant, people tend to think this time IS different, from Dutch tulip mania all the way to bubble and up until this recent longest run bull market. Another thing learned from this episode is that as global economies become greatly interlinked the world markets seemed to have synchronized sell-offs in the same intensity, diminishing the effectiveness of geographic diversification. This is why people flocked to the usual safe haven assets such as US treasuries, rapidly depressing the 10 year treasury yields.

Who will save the market out of this misery? As always all eyes are on the Fed. There have already been some speculations that Fed will probably cut rates three times this year. Fed had never explicitly stated that it would cut rates this year. However, Fed did hint it would take any action it needs to stabilize the US economy. Granted, stock market is not equal to economy. Still, Fed is closely monitoring the situation. According to Wall Street Journal, Federal Reserve Chairman Jerome Powell signaled Friday that the central bank was prepared to cut interest rates if needed. Ah, talking about the market’s reliably dependable ally. But, don’t forget that the stock bull market was fueled by last year’s Fed’s rate cuts as well as corporate tax cut. Also, don’t forget that the coronavirus outbreak is a health issue not a financial issue. What is worse, given central banks of major developed countries have already cut their benchmark rates so low before this market sell-off that rate cutting may have limited effects on the market and/or world economy. What about fiscal policy? President Trump’s administration just released a $4 trillion spending budget. A further fiscal stimulus will further aggregate the problem of record US deficit. So, if the US economy slips into recession, it will be in a difficult situation this time.

As an individual investor, you are probably searching for answers and trying to make sense of those giddy headline news. You may hear noises such as “sell all”, “buy the dip”, or “do nothing”. These can all make sense depending on individual situations. I think now one of the silver linings for individual investors is the strong US jobs market. It is a big contrast between this time and the financial crisis of 2008-2009 where the unemployment rate once reached 10%. I also agree with what Fed Chair Mr. Powell said in a statement released Friday afternoon: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” So, how can an investor ride out this market volatility? If you have been working with an advisor, I am sure you and your advisor have already hashed out a plan precisely for times like this. If you don’t have a formal plan, don’t panic. The market goes up and down. Volatility is part of the market. If you are antsy and feel like doing something, instead of guessing where the market bottom is, take a deep breath and do the following things. After you go through these steps, you will probably have an idea of what you need to do next. Here is the list:

  • Check if you have stashed away 3-6 months of your living expenses in a safe investment vehicle such as a savings account or money market fund. This is your emergency fund. If you don’t have one, then start by saving $5-$10 per day or more if you can afford to do so.
  • Check if you have adequate insurance for you and your family. The reason why you need to do this especially now is that if you don’t have adequate insurance, say, a large medical bill in the near future that is not covered by your health insurance could force you to sell some or all of your investments in a downward spiraling market.
  • Talk to your loved ones and together write down your family’s financial goals. Sort them into three groups: near, inter medium and long term goals. Then, estimate to your best knowledge the amount of funds each goal needs. Near term goal means it is happening within 2-3 years. Inter medium term goal means anywhere between 5-9 years. A long term goal means anything in 10 or more years. After you finish this step, you will pretty much have a ball park idea of how much money you need for near, far future and in between.   

If you still feel queasy about the current situation, talk to your advisor and address your concerns together. Remember for all the advice out there the ones appropriate for your friends or coworkers are not necessarily suitable for your situation; it all depends on your individual circumstances.