In a three-day stretch to start the week, the Dow dropped 1,071 points, climbed 565 points higher the next day, only to give back 1,051 points yesterday.
It’s a wild ride, and one that had many investors worried.
Unfortunately, it meant that millions of investors, possibly yourself included, made poor decisions three days in a row.
They panic sold on Monday as the Dow plummeted, fearful of losing even more of their nest egg.
When the market rallied on Tuesday, they worried about missing out and quickly bought back in.
And then on Wednesday when the Dow dropped over 1,000 points, they hit the exit button once more.
It’s not easy to watch the market yo-yo up and down and do absolutely nothing with your retirement portfolio but sit on your hands.
It’s human nature to want to do something when you see your hard earned money temporarily worth less than it was the day before.
If this sounds like you, you’re not alone.
On Friday, February 28th of this year the Dow Jones Industrial Average closed down 10.5% for the week.
Research from Alight Solutions 401(k) Index, which tracks daily activity at 401(k) plans provided by large employers, showed trading activity that day was the highest in the index’s history at 15.8 times normal volume.
The previous day, February 27th saw the Dow close 2.8% lower, and trading volume in 401(k)’s was 11.37 times higher than average.
“Even in the depths of the financial meltdown in October 2008, we didn’t see this type of abnormality,” said Rob Austin, head of research at Alight.
The Best Way to Handle Market Volatility
If you are spooked by volatile markets like the one we’ve had this week, the important thing to evaluate is your risk appetite.
If you are retired or nearing retirement, think about your portfolio allocation and if being invested in stocks is right for you. If you are over-invested in stocks, you could be putting too much of your nest-egg at risk late in the game.
Most financial planners or investment advisers like the rule of thumb “100 minus age.”
Using a 65 year old for an example, the math works out to be:
100 – 65 = 35.
So you shouldn’t have more than 35% of your portfolio in stocks and have at least 65% of your portfolio in fixed income.
Of course every situation is different, but these are “rules of thumb” for a reason: for the vast majority of people, they work.
The other consideration with your age is the time you have left to be invested. The same 65 year old we used as an example above will likely live past the age of 80. That’s at least 15 more years to be invested in the market to make up for any temporary losses today.
So losses today, while painful, aren’t crippling if you:
- Don’t sell. It’s one thing to be down on an investment today. It’s another thing to sell the investment and lock-in a loss you can never make up.
- Take a long term approach. Being down 20% on an investment might hurt, but if you have 15 investment years left to make up the loss, 20% seems like nothing.
While market volatility isn’t easy to deal with, having a clear game plan and not getting caught up in the day-to-day fluctuations gives you a better chance of long term success.
Kudlow: Economy Doing Great, Second Shutdown ‘Really Big Mistake’
White House Economic Advisor Larry Kudlow says that the country is squarely in the middle of the “v-shaped” recovery that everyone had hoped for, and despite reports of coronavirus hotspots popping up, shutting down the economy for a second time would make the “solution worse than the disease.”
Kudlow spoke on “Fox and Friends” yesterday and said that the White House is monitoring the jump in new coronavirus cases in states like California, Arizona, Texas and Florida, but added that as a country we now know what works to stop the spread, and just need to work together.
“We know the right mitigation, which has worked, and if we use that wholeheartedly and respect each other, I think we’ll get out of this pretty well and it will not stop the V-shaped recovery.”
On A Second Shutdown
He added that a second shut down would be a “really big mistake.”
“Another shutdown, in itself is controversial,” and would “do more harm than good,” said Kudlow before adding, “It would harm everyone. Not just businesses — the V-shaped recovery would give way. It would harm kids, we saw numbers on depression, drinking and so on… that solution would be worse than the disease.”
Kudlow highlighted the job growth in the last two months, and pointed out that jobs are being added back so quickly, workers are now quitting jobs to search for new, higher-paying ones.
He said there existed a “tremendous burst of jobs in May and June” and “tremendous record hiring rates. People are starting to quit their jobs again, which is extraordinary, in order to shop around for better jobs and wages.”
All those workers looking for jobs should bring down the unemployment rate to as low as 7% iby the end of the year, according to St. Louis Federal Reserve President James Bullard.
That would be quite a rollercoaster ride for the job market, which has swung from a 50-year low unemployment rate of 3.5% earlier this year, to a post-WWII high of 14.7% in April.
U.S. Economy Doing “Very Well”
Appearing on “Closing Bell” yesterday, Bullard said “I think we’re tracking very well right now. Seems to me like by the end of the year you can get down certainly to single digits, probably even below 8%, maybe 7% by the end of the year.”
A surge in new cases could slow the re-hiring of workers across the country, but Bullard believes that wearing a mask will become standard and that will help bring back jobs and boost the economy.
“If we get to that situation, we’ll have the disease under control,” he said. “What I like about that scenario is it does not rely on a vaccine coming or a therapeutic coming. We can use simple, easy technology that we have today, get a good situation, get most of the production back to normal.”
Bulls See ‘Once-In-A-Lifetime’ Opportunity, Bears Worried Market Will Drop 10%
The coronavirus continues to be a battleground for stock market bulls and bears. This comes with the bulls pointing to an opportunity and an economy that is slowly recovering. It also comes with the Federal Reserve providing trillions of dollars in stimulus.
One of those bulls in Marc Lasry. He runs a $14-billion Avenue Capital investment firm and co-owns the Milwaukee Bucks NBA team.
He views the coronavirus pandemic as a “once-in-a-lifetime” opportunity to make money.
“I know you’re not supposed to say this, but it’s a once-in-a-lifetime opportunity. You’re not going to see this again: Where you’ve actually got an economy that’s fine, and you’ve got a Fed pumping trillions of dollars in.”
Lasry’s firm specializes in providing funding to distressed businesses. The number of bankruptcies piling up means more business for him. Just today, men’s clothier Brooks Brothers filed for bankruptcy protection.
“You’ve got a lot of companies that are in trouble,” Lasry said, adding that today’s business environment is very similar to what he saw during the Great Recession. “It’s a once-in-a-lifetime, but it happened 10 years ago, also.”
Is the US Better Prepared?
He adds that while the outlook for many forcibly closed businesses as part of the economic shutdown doesn’t look promising, the country as a whole has become better prepared to weather the storm compared to that of the Great Recession.
“Today we all know something,” he said. “We will be fine in two years. People will be back out, there will be a vaccine. The question is: How long will it take to get back to normal?”
If you ask Savita Subramanian, she says she’s not a bear, but does expect the stock market to end the year almost 10% lower than it is today.
Subramanian, the head of equity research at Bank of America, says the economy is facing a litany of headwinds.
“I wouldn’t paint myself as a bear but the risks between here and year end are completely to the downside,” Subramanian said. “We’ve had a reopening frenzy and now we’re seeing payback.”
The Negative Outlook
Unlike Lasry, Subramanian felt “really worried” that the fiscal and monetary stimulus used to boost the economy has pulled forward future growth.
She also points to a historically-expensive stock market. Three things had driven the gains of that market, and all of them might come to a grinding halt soon: globalization, falling interest rates, and tax cuts.
Subramanian says a Democratic victory in November will likely have the effect of reversing those market-friendly policies.
Stocks continue to climb higher despite surges in new coronavirus cases. With this, Subramanian said she doesn’t think the markets are assuming everything will be okay. She notes that “work from home” stocks are still doing very well. Also, she mentions that if investors thought we would be returning to offices and jobs anytime soon, those stocks should suffer.
She advises being overweight consumer staples, industrials, technology, and financial stocks.
Wall Street: Biden’s Tax Policies Would Harm The Stock Market
The November election just months away. With this, Wall Street has started to grapple with the unpleasant thoughts of a Democrat in the Oval Office and new tax policies.
President Trump steered the economy to record low unemployment and the stock market to all-time highs. However, the potential for major headwinds should Joe Biden decide to reverse many of the president’s policies has Wall Street fearing the worst.
What Would a “Blue Wave” Cause?
A “blue wave” with a Democratic president and both the House and Senate controlled by Democrats could mean tax hikes and other legislative actions that slow economic growth and drag on the stock market.
President Trump recently said that a Biden victory would “Crash the market. 401(k)s will be down the tubes, the wealth of the country will be down… They’re going to raise taxes, they’re going to raise regulations, and they’re going to put everyone out of business. It would be a disaster.”
David Rosenberg, chief economist and strategist at Rosenberg Research, agrees. He believes a Biden victory and ultimately higher taxes would harm the markets.
“The implications for the stock market from this shift to higher taxes are generally negative. A drop in the S&P 500 of 10.5% from where it is today is well within reason,” Rosenberg added.
Expectations are that Democrats would increase the capital gains tax for the highest earners. Also expected is a raise in the corporate tax rate. This raise aims to pay for some of the $6 trillion in proposed spending over the next 10 years.
According to the Congressional Budget Office, the country hasn’t even had a chance to experience the full benefits of the Tax Cuts and Jobs Act that Trump signed into law in 2017. Biden may live up to his promises of raising the corporate tax rate. If that happens, the Tax Foundation says the US GDP will be reduced by 1.5%.
Morgan Stanley and Goldman Sachs are among a handful of Wall Street banks warning that higher tax rates will drag down the stock market.
Michael Wilson, chief U.S. equity strategist at Morgan Stanley, told clients last month that raising the corporate income tax to 35 percent from 21 percent would make “100-150 points on the S&P 500 a baseline for the impact of a tax cut rollback, all else equal.”
David Kostin, chief U.S. equity strategist at Goldman Sachs, called Biden’s tax policy a “larger risk to earnings and consequently to equity prices” than the COVID-19 pandemic. The pandemic caused the stock market to plunge 34% before rebounding.
A Biden victory in November is seen as a “neutral to slight positive” by the equity strategy team at JPMorgan. The team explained that presidential challengers, like Biden, “typically campaign at an extreme,” but veer back toward the center following the election.
Let hope we never have to find out how detrimental Biden’s tax policies would be for our country and our economy.
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