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Stocks Swing as Economy Confronts COVID-19

Stocks ended the week on a down note as investors digested further evidence of the economic impact of the COVID-19 outbreak. The decline capped what would otherwise have been a banner month of April, when the Dow Jones Industrial Average and S&P 500® Index posted their strongest monthly gains since the late ‘80s. Both indexes are still down more than 15% from their February peaks.

Stocks fell Friday after giants including Apple, Amazon, and Exxon Mobil released reports highlighting the challenges companies face as the economy grapples with the restrictions imposed to counter the pandemic. Those reports came as other data showed that U.S. manufacturing activity had slowed to its slowest pace in more than a decade in April, and the five-week tally for unemployment claims surpassed 30 million.

May can also be a difficult month for the market, as some investors—following the adage “sell in May and go away”—move into cash ahead of the summer months.

“Stocks are likely to remain under pressure while the country begins to open on a state-by-state basis, and until signs of both virus and economic stability emerge,” says Schwab Chief Investment Strategist Liz Ann Sonders. “Investors may be better served by avoiding trading on each data point and focus on longer-term asset allocation plans.”

What investors can do

  1. Resist the urge to react to daily market movements. Selling stocks when markets drop can make temporary losses permanent. Staying the course, while difficult emotionally, may be healthier for your portfolio. This doesn’t mean you should hold on blindly, but we suggest taking into account an investment’s future prospects and the role it plays in your portfolio, rather than being guided by short-term market movements.

    “If you don’t need the money for a few years, and your investments are consistent with a longer-term financial plan, then your best course of action may be no action,” says Kathy Jones, Chief Fixed Income Strategist for the Schwab Center for Financial Research.

    If you need money in the next few weeks or months, then you may need to sell some assets to raise cash. To lessen the impact of selling on your portfolio, you may want to harvest tax losses, Kathy says. If you have some investments that have done well, you might want to take some capital gains.

    At the same time, investors should avoid trying to time the market. This rarely works—but it’s especially difficult to try to time the market around unexpected geopolitical events, like COVID-19. Focus on the time horizon for each goal.

     
  2. Rebalance your portfolio as needed. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to asset classes that have become underweight. It’s a good idea to review your portfolio for rebalancing opportunities at regular intervals, and is worth considering when markets have been very volatile.

    “If you are a disciplined longer-term investor that has a diversified strategic asset allocation plan, you could consider more frequent rebalancing tied to how far asset classes have moved relative to [your] longer-term targets,”
    says Liz Ann.

    Schwab clients can log in and use the
    Schwab Portfolio Checkup tool, under the Portfolio Performance tab, to assess whether their portfolios are still in balance with their target asset allocations.

    Because markets continue to be volatile, Liz Ann suggests rebalancing gradually instead of doing it all at once. “Consider taking a dollar-cost averaging approach both on the ‘add’ and ‘trim’ sides, versus picking a particular day to make adjustments,” Liz Ann says.

     
  1. Make sure your portfolio is consistent with your goals, risk tolerance, and preferences. If you’re uncomfortable with recent market volatility and your goals are short term, you may want to decrease your exposure to riskier assets and move that money to Treasuries or bank certificates of deposit (CDs) to reduce volatility, Kathy says.

    If the current bout of volatility has made you reevaluate your priorities, consider taking the time to rethink the key features of your financial life—whether it’s your budget or debt situation, or longer-term issues such as insurance and your estate plan.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.

Periodic investment plans (dollar-cost-averaging) do not assure a profit and do not protect against loss in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

Diversification, asset allocation and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability. 

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, financial planner or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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