March 12, 2020
That’s the question top of mind for investors coming to terms with the extreme volatility they’ve experienced related to the spread of coronavirus and plunging oil prices. On Wednesday, the Dow Jones Industrial Average entered a bear market—or more than 20% down from its previous high—for the first time in 11 years1. While it’s impossible to predict what could eventually stabilize the markets, policy actions may be key, says Michael Hartnett, Chief Investment Strategist for BofA Global Research.
Partially driving the decline is the heightened uncertainty investors feel about the potential effects of coronavirus on the economy—and their own lives. It’s too early to know whether possible additional action by the Federal Reserve, beyond its March 3rd .5% interest rate cut, and various government proposals under consideration will help to jumpstart the economy and reassure investors. But such actions are positive signs, says Hartnett. They clearly indicate that policy makers are prepared to take dramatic steps.
“With more data, including new policy responses, we should have a better understanding of the eventual economic and market impact,” notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
"The Three P’s"
While precise forecasts are impossible, Hartnett says investors can probably expect the current volatility to continue for at least another two weeks. In the meantime, Hartnett and other analysts will be closely watching the “Three P’s”—policy, positioning, and profits—for signs that markets are stabilizing.
“Policy” includes any actions the federal government and central banks, such as the Federal Reserve, may take. “Positioning” refers to investors who sell stocks or other investments out of panic. At some point, those investors will have sold everything they can, and the selling will begin to ease, notes Hartnett. “Profits” marks the point at which investment markets have factored in their worst assumptions about corporate earnings. As recently as 2016 and 2018, says Hartnett, the Three P’s came together to signal the end of volatility.
Of course, every situation is unique, and this time market volatility is unfolding against the backdrop of a global pandemic. Still, “when you get to that point of bearish positioning and profit assumptions, and a big policy reaction may be put in place, you can get a big turnaround in the market,” Hartnett says. “In order for the capital markets to stabilize, there needs to be a defined policy response,” adds Hyzy.
What can investors consider doing?
“Remember to stay focused on your financial goals and the long-term strategies you’ve put in place to pursue them,” says Hyzy. Looking out over the next several years, diversification will be key. “As the market volatility subsides, we would look for rebalancing opportunities, in accordance with your risk profile, in order to maintain diversification and possibly help to alleviate the effect of the declines investors have been experiencing.”
1 “Dow Skids Into Bear Market, Heralding an Uncertain Future,” New York Times, March 11, 2020.
Information is as of 03/12/2020
Opinions are those of the authors and are subject to change.
The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management ("GWIM") clients, is part of the Investment Solutions Group (“ISG”) of GWIM, a division of Bank of America Corporation (“BofA Corp.”).
BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.
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