Five keys to navigating pullbacks

Published March 20, 2020
 A woman reading from her mobile phone while sitting at a desk.

These are extraordinary times. The unique nature of this biological event on both a global and regional scale leaves many of us with an unsettled feeling.

We're all concerned about the health and well-being of our families and friends with an added layer of what is happening in the markets. In fact, the only expectation we can have is that market volatility likely will continue for some time.

You may be wondering when it will end, what have we learned and what you can do today. Let's break down those key questions.

Can we expect the markets to rebound? And how long will a rebound take since they have fallen so far?

The short answer is yes: We can expect a rebound. The longer answer is it might take some time, and we think this volatility is likely to continue in the interim.

The magnitude of these daily swings is a reflection of the unique risk of this human health care crisis and the unprecedented efforts to contain its spread. This range of unknowns raises the uncertainty around the timing of a rebound and the impact between now and then.

Here are four elements we believe are necessary for the market to ultimately find some footing and begin that rebound:

  1. A peak in the rate of confirmed new coronavirus cases – Eventually, the market is going to have to get some confidence around the ultimate economic impact and just how long it’s going to take to get our hands around this from a health care perspective.
  2. An aggressive monetary policy approach – We’re already seeing this. The Federal Reserve recently cut interest rates down to zero, and also announce a bond-buying program to provide extra money and liquidity into the financial system. That's going to be requisite part of this ultimate process for the market to find some footing and we've already seen some measures there. We're probably going to see the Fed take additional steps to support the banking system, to support the flow of credit to consumers and to businesses. But we think that's a good sign that we’ve seen that puzzle piece put in place.
  3. An aggressive fiscal policy response – Fiscal policy being things like tax changes and adjustments, the ability to put money into consumers' and businesses' hands to bridge the gap of this period of uncertainty. That’s likely going to require a huge coordinated effort on the case of Washington as well as policymakers at the state level. We think ultimately that will be another key component of the economy bridging the gap to an eventual rebound.
  4. Some visibility and some revisions to corporate earnings – Given the economic, business and consumer shocks that are occurring, we're going to see expectations for corporate profits come down. As those revisions occur, the market could start to get more comfort around the ultimate impact in the short term to corporate America, knowing that corporate earnings are the underpinning of the long-term performance of the stock market. More broadly, the market will need to look for a couple of these key milestones along the way. They're not going to occur immediately, but as they begin to take shape, we think that helps the market start to rebound over the broader term.

What can we learn from history?

There are no perfect parallels between what's happening today and what's happened historically, either in the economy or in the financial markets. But we do know that the stock market has peaked on average about six months before a recession emerges, with economic conditions decelerating before eventually falling into contraction.

Things are different today. Current conditions are anything but typical at the moment, and given the unprecedented measures being taken to limit this contagion, we're likely to see a material downshift in the growth rate of the economy. At this stage, a recession is much more likely, although we believe it will be relatively short.

This is not, in our opinion, a repeat of 2008/2009, however. We're seeing similar elements, such as extreme volatility and big declines, show up in the stock market. But it's important to draw that distinction because that does help ultimately shape the rebound that we think will take place.

The financial and banking systems coming into this health care crisis were on firm footing, and still appear to be. We don't anticipate unemployment to experience a sustained spike, as we would traditionally see in a typical recession. You would see unemployment rise to excessive levels and then take a long time to find its way back down.

That’s typically the case in a traditional recession and the root cause for a more slowly developing recovery. To be clear, we think the economic impact is going to be quite severe in the near term, but we believe we have a foundation to lead a rebound later on this year and into next year.

Given the economic foundation, we think the recovery in economic activity and business investment can be faster and more vigorous than we would normally see coming out of a recession.

Looking back at bear markets (a decline of 20% or more in the stock market) since 1955:*

  • The average total decline was about 26%, which is a little bit less than what we’ve seen so far
  • The time from the initial 20% drop to the bottom in the stock market was an average of about 86 days
  • The stock market went on to return an average of 25% over the next year and 32% over the next three years

We know this condition is unique. We don't expect it perfectly replicate this historical data. But markets ultimately find a bottom, and we think the broader-term outlook can remain positive.

What can I do?

We believe these five actions can help you navigate this period of uncertainty and market volatility:

  1. Don’t panic. This too shall pass. Now that can become a bit cliché, but we think we’ve learned time and time again, from market panics to market pullbacks, that those investors who keep a level head and make disciplined decisions put themselves in the best position to navigate the volatility.
  2. Let your goals guide your decisions. It can become easy to base your investment decisions on headlines and fear. But importantly, your goals are the reason you’re investing. Make sure your investment decisions align with those goals for the long term.
  3. Put time on your side. As long-term investors, we are blessed with the advantage of time. Make sure you’re evaluating your portfolio’s performance and your ultimate achievement of your goals over a longer period of time.
  4. Leverage the power of diversification and balance. You can’t dodge every market twist and turn, but having a balanced, diversified portfolio can ultimately help you navigate it in a much smoother fashion.
  5. Be opportunistic. Long-term investors don’t need to capitalize on this pullback all at once but should consider opportunities to benefit from this decline over the longer term.

Opportunities today

  • Rebalance. Trimming overweight allocations in your portfolio and then using that to fill gaps in underrepresented areas can help put you in position to navigate the volatility as it continues.
  • Consider systematic investing. Take advantage of the ongoing volatility by systematically investing at regular intervals. This reduces the “timing” aspect as volatility plays out and puts you in a position to navigate the ups and downs.

Talk to your Edward Jones financial advisor about whether these strategies may be appropriate for your situation to take advantage of this volatility and keep you on track to your long-term goals.

Important information:

*Source: Bloomberg, S&P 500 Index. Past performance of the market is not a guarantee of how it will perform in the future. The S&P 500 is an unmanaged index and not available for direct investment.

Systematic investing does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.