Buckle Up: Market Volatility May be Here to Stay

THINGS TO KNOW ABOUT TODAY’S MARKET VOLATILITY:

• Today’s market volatility was fueled by a drop in oil prices and new COVID-19 cases.
• The 15-minute halt in trading this morning was actually a good thing.
• You have developed a strategy with AMG that is designed to help you be successful through times like these. Now is the time to rely on your plan.

WHAT DROVE TODAY’S VOLATILITY?

The sharp drop in oil prices was set off by OPEC failing to strike a deal with Russia (and its allies) about oil production cuts. Saudi Arabia then responded by slashing its oil prices while looking to ramp up production. This, added to heightened coronavirus concerns, caused a market sell off and drop that triggered a halt in trading.

TODAY’S BRIEF HALT IN TRADING IS A GOOD THING

Sometimes you just need to take a break. That’s what happened this morning when the S&P 500 experienced a 7% drop and trading was halted for about 15 minutes. This market-wide circuit breaker, built into market rules, helps prevent the market from entering a free fall. The circuit breakers are designed to happen automatically and are intended to give markets and investors an opportunity to pause and not panic. They slow trading down a bit and give investors time to step back and process the information that is influencing decisions. It’s the market equivalent of taking a breather and coming back with a clearer head.

WHAT IS DRIVING OIL PRICE DECLINES?

Steps taken to contain COVID-19 across the world have slowed global production and led to weaker demand for oil, especially in emerging markets. Consequently, oil prices fell off a cliff. Markets were particularly disappointed because Saudi Arabia and Russia were expected to cut production in an effort to prop up oil prices. However, they could not agree. There may not be a quick resolution to this impasse because Russia, in particular, claims it does not need higher oil prices. On a positive note, since most demand growth comes from emerging market countries, lower energy prices will help in their recovery.

COVID-19 IS STILL HERE

Assuming containment happens by the end of the 2^nd quarter, the American economy should begin to pick up steam in the 3^rd quarter. With prompt action to effect containment of COVID-19 and appropriate monetary and fiscal policies, the United States and the global economy should be able to recover most of the recent economic losses and avoid a recession.

WHAT SHOULD INVESTORS DO?

Portfolio diversification and commitment to long-term strategies are key to mitigating downside risks. This is one of the reasons we recommend that clients keep cash and cash flow in their portfolios to cover 12-24 months of needs, so they don’t have to sell equities when the market drops. Stick to the strategy you developed before the market volatility started and refrain from making emotional choices. This is not the time to sell equities. As market volatility subsides, there will likely be opportunities to capture. As always, if you have questions, please contact your AMG Advisor.