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Navigating Volatility

Financial markets continued their slide today as US fiscal policy and ECB monetary policy responses underwhelmed investors last night. The Fed’s announcement of its $1.5T funding plan today will ensure continued liquidity and proper functioning in the Treasury markets and financial system; however, their actions won’t do much to address the coronavirus scare and the economic impacts that will result from it.

We understand that these are difficult times and the growing recognition of how a pathogen might affect our daily lives is uncomfortable and eerie. Few people like volatility and nobody likes to see the value of their financial assets decline. Regardless of the cause, equity markets have tended to overreact in the short-term during times of major emotion and uncertainty, but eventually recover once the noise dies down.

Figure 1: We’ve Been Here Before

We've been here before

Source: BlackRock

Q2 earnings and other economic data will undoubtedly be impacted by the coronavirus, collapsing oil prices and faltering consumer confidence. Yet while recession risks are rising, we aren’t quite ready to declare that the end of the longest-ever US economic expansion is a fait accompli. Lower interest rates and energy prices are powerful forces to counteract these short-term disruptions, and hopefully consumer confidence rebounds as the worst of the virus spread eventually passes through the population.

Figure 2: It’s Not Over Until It’s Over

It's not over until it's over

Source: Cornerstone Macro

In the meantime, we’d like to remind investors that market rebounds, like market declines, are impossible to predict, but inevitably happen. Staying invested and having a portfolio that is tailored to your financial plan are the keys to success (and peace of mind) during turbulent times. 

Figure 3: Stick with the Plan

Stick with the plan

Source: BlackRock

As mentioned in our last edition of Capital Insights, we began reducing risk in our client portfolios late last year, by lowering equity allocations and shifting to a more defensive posture. We also increased portfolio diversification by adding uncorrelated assets such as gold, liquid hedge funds and private capital where appropriate.

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