Last month’s letter mentioned the coronavirus’ potential to infect global supply chains. February showed the risk materializing along with more widespread impacts on travel. The Federal Reserve’s 0.50% rate cut on March 3rd did little to assuage investors, highlighting the limitations of monetary policy tools in “treating” the virus. Nevertheless, consumers are enjoying the benefits of record low interest rates and energy costs. Consumer behavior will likely be the most important economic determinant in the next few months as they either continue to spend or change habits in response to virus concerns. If there is one thing markets hate, it’s uncertainty. Markets have thus far struggled to evaluate the potential depth and duration of risks posed by the virus. As time passes, scientists and markets will gain a better understanding of mortality rates, treatment options, vaccine potential and warm weather’s ability to reduce the rate of spread. This information should reduce uncertainty, and therefor volatility.
So far, 2020 has reminded us of the price (volatility) investors pay for the reward of historically superior long-term stock returns. The most widely followed volatility measure reached two-year highs as the S&P 500 fell nearly 16% in a few days. Attempting to play daily swings in the market during periods of high volatility is often a losing endeavor. Selling near a bottom is one of the most destructive portfolio actions an investor can take, as they endure losses on the way down and miss gains on the way back up. The graph below highlights the importance of participating in the market’s biggest up days, many of which follow or coincide with downturns. An investor would have barely made money in the past 20 years had they missed out on the market’s 10 best days. History shows patience has paid off during these times of intense volatility. Stay patient.
Index data sourced from Thomson Reuters Eikon, research performed by Woodley Farra Manion Portfolio Management
– Jared J. Ruxer, MS