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Why are markets so volatile and why have they reacted so negatively to COVID-19?

Watching the markets can feel like a dramatic spectator sport, and if it weren’t for the fact our own dollars were at stake, might be just as entertaining. Kevin Grogan explains why things get so wild.

Transcript

Tim Maurer:
Hello, and thank you for tuning in to Ask Buckingham, an ongoing video podcast series where we invite thought leaders across many disciplines and wealth management to respond to the questions on your mind. My name is Tim Maurer, and I have the privilege of hosting these short Q&A discussions as the Director of Advisor Development for Buckingham Wealth Partners. And I want you to know that I’m also a wealth advisor with more than 20 years of experience, and a client of the firm.

Tim Maurer:
The volume of information coming at us these days is so vast, and the pace at which that information arrives is so fast, that it’s a struggle to keep up with what you need to know to make the best decisions for you and your family. Our hope, therefore, is that this ongoing conversation will become a source of clarity in the midst of confusion and chaos, and provide insight that helps you better understand what’s going on in the world, financially and otherwise.

Tim Maurer:
Today, we’ll be hearing from Kevin Grogan, Buckingham’s Managing Director of Investment Strategy, and here’s the question we’ll be tackling. Kevin, why are markets so volatile in general, and why had they reacted so negatively to the coronavirus and COVID-19.

Kevin Grogan:
So, certainly both things are true. We have seen a lot of volatility in the markets recently. We have seen a pretty significant pullback here in the stock market over the past several weeks. And I think, really, the reason behind both of those things is that we are all seeing the disruption that has resulted from the Coronavirus on both markets and on earnings for corporations.

Kevin Grogan:
And I think you kind of break it down into two different timeframes. So here, in the short term, I think it’s pretty obvious that we can see that corporate earnings are likely to be impacted. As you think about restaurants, we think about airlines, but think about entertainment. All of these different facets of life are likely to see lower earnings as a result of what we’ve seen so far. And that’s pretty easy to price in, but I think that’s actually a relatively small portion of what we’ve seen so far.

Kevin Grogan:

I think a bigger portion has to do with the longer term impacts that we might see, so if this virus plunges us into a recession and we start to see companies across various sectors start to have to lay off workers, that could really impact longer-term demand. I think that’s really what we’re seeing in markets today, is a pricing in of the longer term impacts of the virus. Again, I think we’re going to see both. We’re going to see both the short term disruption and a longer term disruption, but what we’re seeing play out in markets is are market participants trying to sort this all out. People aren’t sure what the longer term disruptions are actually going to wind up being. We just don’t know yet, and I think that’s what’s leading to the volatility and the pullback we’ve seen here recently.

Tim Maurer:
So, Kevin, do you think that the market is processing the disruption of the day, that is the news each day, or is the market anticipating what may be happening economically speaking well into the future?

Kevin Grogan:
It’s both. The market is incorporating all new information as soon as it becomes available, and it’s interpreting how that news would impact the future economic news that we see. So a few weeks ago, there was an unemployment benefits report that came out that beat previous expectations, but it didn’t move the market up at all because that’s all stale data. Knowing what unemployment claims were three or four weeks ago is totally irrelevant to what’s happening in the market, because the market is forward looking, looking to see what will unemployment claims be a month from now, two months from now, six months from now. And it’s those sorts of things are what’s driving the market on a day to day basis.

Tim Maurer:
Interesting. So, markets in general are just volatile and more uncertainty that exists the more volatile they are. How do you think we can best apply that knowledge as investors today, Kevin?

Kevin Grogan:
Yeah, I think that the best way to apply that to your portfolio is, number one, make sure you understand that this volatility can happen from time to time. So, we’ve been through an environment here over the past 10 years or so, where we’ve seen relatively little volatility in stock markets and it can be difficult to remember that there were very volatile periods in the past. So, the first thing is understanding, before you invest in stocks, understanding that they can be very volatile, particularly during periods of crisis. And then number two, it’s not just important to understand that, it’s also important to build an asset allocation that reflects that understanding and reflects your tolerance for risk. And then building that into your well thought out investment and financial plan is really important as well.

Tim Maurer:
So, in other words, we should proactively build an asset allocation anticipating the times of crisis will come and have an allocation that’s designed to handle both the downside and then take advantage of the upside when the time comes.

Kevin Grogan:
Absolutely correct. So, we would advise rebalancing as needed, to take advantage of buying low and selling high. Of course, we’re not in the business of calling when the bottom is. We don’t know where the bottom or the tops will be. But if you have an asset allocation, you specifically state when you’re going to buy and when you’re going to sell, that helps enforce discipline in terms of always buying low and selling when assets are higher, relative to other assets in the portfolio.

Tim Maurer:
Well, thank you Kevin Grogan, and thank you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website askbuckingham.com, or emailing us at question@askbuckingham.com, or you can just click the corner and it’ll take you directly to the website.

Tim Maurer:
Remember, there are no dumb questions, but unfortunately, there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good decision making. So please follow us. And by all means, ask Buckingham.

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