The most difficult part of history is living through it: Risk assets across capital markets have experienced a historic decline over the past week. Uncertainty over the Coronavirus has been an exogenous shock to the global economy. Its reach, impact on global supply chains, unknown impact on demand, and resulting impact on company earnings have sparked a “risk-off” move in equity markets that has sent volatility to levels not seen since the 2008 global financial crisis. At the same time, Treasury yields have declined to levels not seen since the first issuance of U.S. debt in 1790.
You can see the overall effect of this uncertainty in the chart below, which tracks a commonly used volatility index (sometimes referred to as the “fear” index).1
Prior to this week, markets had been extremely resilient to potential areas of concern, whether it was U.S. military developments in the Mideast or ongoing political developments or even the initial stages of the virus itself.
But this latest downward move has been of significant magnitude, swift in its velocity, and painful in its impact. However, the effect on realized returns in a portfolio must be put in appropriate context. Having the appropriate time frame, not just determining the appropriate asset allocation, but also in making an assessment on performance, is important for framing the current market environment.
The chart below shows the S&P 500 across three time frames — the last week, year to date, and the last year. It shows that losses can be more dramatic in the shorter term rather than the longer term. But when viewing it, please remember that past performance is no guarantee of future results.
Risk, the essence of investing: We recognize it can be of little comfort to investors that may see the last week as not just a financial loss, but rather the loss of future hopes and dreams. But it is important during these periods of volatility and uncertainty to remember that allocating to different investments is the assumption of risk, and weathering these risks is what generate return across the capital markets over time. (Related: The essentials of investing )
The chart below is an indication of how riskier investments, like stocks, have tended to get rewarded with greater returns over time.
Where do we go from here? : While the impact of the virus is yet to be determined, there are some things that have become clear. The flight to safety has:
- Created more attractive valuations for risk assets, from stocks to high-yield debt.
- Brought the entire US Treasury yield curve below the rate of inflation.
At MassMutual, we understand that the recent market volatility is a fluid situation, and thoughtful risk management is an important component of how we think of constructing durable and efficient retirement solutions. By mitigating downside risk, we believe our various plan participants and clients are more equipped to confront the behavioral biases that all too often lead to suboptimal decision-making. We believe the ability to stay invested throughout market regimes, and consistently assume the appropriate level of risk, is the North Star in securing and protecting financial futures.
For individual guidance and advice, contact your financial professional. Don't have one? Find one here.