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How to Handle Market Volatility

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How to Handle Market Volatility

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:

  1. 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.
  2. 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.

Business

Stocks Close In the Red After Massive 900-Point Rally Falls Apart

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Stocks Close In the Red After Massive 900-Point Rally Falls Apart

In what could be an ominous sign of things to come, the stock market couldn’t hold on to a massive rally yesterday. Stocks closed the day in the red.

The Dow Jones Industrial Average climbed as much as 937 points intraday. This was before it gave back all the gains and closed the day down 26 points.

It could turn out to be a turning point that many experienced investors have been predicting.

Their belief is that the rapid 20% rebound in stock prices couldn’t last. They also believe that we may eventually re-test the March 23 lows.

900-Point Rally Fails

Jim Cramer, host of ‘Mad Money’ on CNBC seems to be slowly coming around to the idea.

“Just think about the last 500 Dow points [Monday]. I don’t know. They were done in, what, about 30 minutes. That’s not sustainable. There are people who are just anxious about taking something off the table because they’ve just seen a remarkable two-day bull market, and now they’re ready to find out about … the various stages that we need to get out.”

David Kostin, the chief U.S. equity strategist at Goldman Sachs, believes that stocks are poised to fall again. He mentioned that it’s likely, if you compare it to how the market behaved during the 2008 financial crisis.

“The way I think about this is [there’s an asymmetry] in terms of downside risk towards a level in the S&P 500 of around 2,000, which is about 25%, and an upside of around 10% to a target at the end of the year of around 3,000. [That’s not symmetrical] in terms of timing. I think the risk is a lot further towards the downside,” Kostin said. He then added: “I would just remind you that in [Q4 2008], there were many different rallies, they’re called bear market rallies, some of which were almost 20% a couple of times, but the market did not bottom until March of 2009.”

“I wouldn’t be surprised if we hit 2,000 on the S&P 500 ”said Alex Chalekian, the CEO of Lake Avenue Financial.

He added “We’re going to see opportunities and we’re going to take advantage of them,” he said. “But in the meantime, there’s no rush to jump back into the market right now.”

Economic Strategists React

Peter van der Welle, a multi-asset strategist at Robeco says “From a sentiment angle, recent exceptional bounces suggest that investor sentiment is still in the denial phase, rather than in the phase of capitulation that paves the way for a new bull market.”.

In addition, Albert Edwards, a global strategist at Société Générale, said that investors hoping that monetary and fiscal stimulus can save the market through this rally have made a mistake. “This optimism is the legacy of a long bull market. Investors can’t conceive that the Fed will ‘allow’ the stock market to collapse. Think again. That was the view in 2007 too,” he said.

Finally, Goldman Sachs conducted a poll with more than 1,800 of its institutional clients as respondents. It found out that 50% believe the lows have not yet been set. The survey also revealed that 75% believe equities remain in a bear market.

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Economy

Stocks Plunge Again, Jobless Claims Surge to New Record

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Stocks Plunge Again, Jobless Claims Surge to New Record

The stock market started the second quarter the same way the first quarter ended, with significant losses across the board.

The Dow Jones Industrial Average, S&P 500 and Nasdaq all slid 4.4% yesterday as investors braced for more bad news about the spread of the coronavirus and historical jobless claims due to the outbreak.

President Donald Trump warned that a “very, very painful” two weeks lie ahead for the country as it faces a rapidly spreading COVID-19 outbreak that is approaching 200,000 cases here in the US.

With uncertainty over how long the country will be shut down in an attempt to slow the spread of the virus, it’s becoming virtually impossible to predict how the market will perform going forward.

“Everything hinges on how long we are in this shutdown,” said Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle Investments, in an interview. “We don’t know how long the shutdown may last, so it’s hard to predict what U.S. growth will look like.”

Adding to the misery on Wall Street, this morning’s initial jobless claims report showed that a record 6.6 million Americans filed for unemployment insurance last week.

That dwarfs the then-record 3.3 million new filings reported two weeks ago, and brings the total claims to nearly 10 million in the last two weeks due to the coronavirus outbreak.

For comparison, today’s numbers were almost 10 times higher than any previous report prior to the coronavirus outbreak.

Excluding the last two weekly reports, the highest week for claims was 695,000 in 1982. And as miserable as the job market was during the Great Recession, the highest number of jobless claims during that period was 665,000 in March 2009.

“We’ve lived through the recession and 9/11. What we’re seeing with this decline is actually worse than both of those events,” said Irina Novoselsky, CEO of online jobs marketplace CareerBuilder.

The lone bright spot in the markets is oil, as the price surged 10% after President Trump mentioned the possibility of a truce in the price war between Saudi Arabia and Russia.

West Texas Intermediate (WTI) futures jumped $2.11/barrel to $22.42 on the seemingly good news.

“Worldwide, the oil industry has been ravaged,” Trump said during a media conference on Wednesday. “It’s very bad for Russia, it’s very bad for Saudi Arabia. I mean, it’s very bad for both. I think they’re going to make a deal.”

Trump added he expects both countries to end their price war within a “few days” meaning they will slow production and bring prices back up.

The president also invited the heads of US oil companies like Exxon Mobil and Chevron to meet with him at the White House to potentially discuss how Washington can help the companies get through the current crisis as they face bankruptcies and massive layoffs.

“I’m going to meet with the oil producers on Friday. I’m going to meet with independent oil producers also on Friday or Saturday. Maybe Sunday. We’re going to have a lot of meetings on it,” he added.

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Economy

Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill

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Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill

“Phase 4” of the government’s economic stimulus plan could include spending up to $2 trillion on improving America’s infrastructure.

The bill already has bipartisan support, and could be voted on as soon as April 20th when representatives of both the House and Senate return to Washington, D.C.

During his 2016 campaign, President Trump said he would make improving America’s roads, bridges and airports a top priority during his time in office.

“The only one to fix the infrastructure of our country is me – roads, airports, bridges,” Trump tweeted on May 12, 2015. “I know how to build, [politicians] only know how to talk!”

While previous attempts to pass a major infrastructure bill have failed, both sides seem willing to try again in an effort to help America’s economy rebound from the coronavirus outbreak.

House Speaker Nancy Pelosi, who is often at odds with the President, said she is “pleased the president has returned to his interest” in the issue. She called an infrastructure proposal “essential because of the historic nature of the health and economic emergency that we are confronting.”

She added “I think we come back April 20, God willing and coronavirus willing, but shortly thereafter we should be able to move forward.”

The Democrat’s proposal is part of a five-year, $760 billion package that includes money for community health centers, improvements to drinking water systems, expanded access to broadband and upgrades to roads, bridges, railroads and public transit agencies.

The plan designated $329 billion for modernizing highways and improving road safety, including fixing 47,000 “structurally deficient” bridges and reducing carbon pollution. It also aimed to set aside $105 billion for transit agencies, $55 billion for rail investments such as Amtrak, $30 billion for airport improvements and $86 billion for expanding broadband access.

“I could provide the legislative language in very, very short order for this package. It’s the funding that’s been holding us up, and if the president insists on funding, then I believe that Senator McConnell and Leader McCarthy will move on this issue,” said Democratic Rep. Peter DeFazio of Oregon, who chairs the House Transportation and Infrastructure Committee.

During an appearance on CNBC yesterday, Treasury Secretary Steven Mnuchin said he is talking with Congress about a potential infrastructure bill.

“As you know, the president has been very interested in infrastructure. This goes back to the campaign: The president very much wants to rebuild the country. And with interest rates low, that’s something that’s very important to him.”

He added “We’ve been discussing this for the last year with the Democrats and the Republicans. And we’ll continue to have those conversations.”

Earlier this week President Donald Trump said he wants to spend $2 trillion on a massive infrastructure package.

He tweeted that “With interest rates for the United States being at ZERO,this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”

“The president very much wants to rebuild the country, and with interest rates low, that’s something that’s very important to him,” Treasury Secretary Mnuchin added.

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