Stocks declined again on Friday, capping the market’s worst week since March, as rising COVID-19 cases and weak earnings-related news from some large technology companies rattled investors. The S&P 500 index lost 1.2% on Friday, and was down 5.6% for the week.
“The economic recovery remains choppy and is again at the mercy of the coronavirus,” says Schwab Chief Investment Strategist Liz Ann Sonders. “Recent speculative fervor in stocks and call options also had kicked in again [in recent weeks], creating a level of froth that left the market vulnerable to profit-taking and sector rotation.”
Uncertainty about next week’s election outcome also may be contributing to market volatility, says Michael Townsend, Schwab’s vice president of legislative and regulatory affairs.
“Markets historically are not particularly affected by which party wins the White House and/or control of Congress, and that seems to be the case again this year,” Michael says. “Rather, investors in 2020 appear more concerned about the implications of an extended period of uncertainty in which the results of the election are unclear or in dispute.”
Global shutdowns raise concerns
Germany and France on Wednesday announced renewed restrictions aimed at controlling rising COVID-19 cases. Although the measures may deal a near-term blow to the region’s economy, if they succeed in containing the virus, it could boost a longer-term recovery, according to Schwab Chief Global Investment Strategist Jeffrey Kleintop.
“Europe may be better positioned for recovery than the U.S., with a combination of furlough and unemployment insurance programs supporting households through the end of 2021,” Jeffrey says.
Treasury yields are likely to remain low
U.S. Treasury yields fluctuated throughout the week, with the 10-year yield falling amid safe-haven buying early in the week, only to rise on Friday (bond prices and bond yields generally move in opposite directions).
“We continue to believe the 10-year Treasury yield is unlikely to rise much above 1%, so with the yield now at 0.86%, any further rise is likely to be limited,” says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “Expectations for near-zero short-term rates for years, as well the potential for the pace of the economic recovery to slow, should prevent yields from rising much further.”
Despite low yields, bonds can still offer benefits. “Although yields are near historically low levels, high-quality bonds can offer diversification in portfolios containing more-volatile investments, like equities,” Kathy says.
However, she suggests investors focus on higher-quality fixed income securities, such as Treasuries or investment-grade corporate bonds. Lower-rated bonds are most at risk during an uncertain economic environment.
“Heightened volatility and concerns about economic growth may lead to lower corporate profits, and add to financial pressure on state and local governments,” Kathy says.
What long-term investors can consider now
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.
2. Make sure your portfolio is consistent with your goals, risk tolerance, and preferences. “When the market is going up and up, it’s easy for investors to think they’re more comfortable with risk than they actually are,” says Mark Riepe, head of the Schwab Center for Financial Research. “Pullbacks have a way of stripping away any illusions on that front.”
“That’s why it’s so important—particularly for the new investors out there—to have a plan for the money you’ve invested,” Mark adds. “If you’re saving and investing for a goal that is still many years away, then the best response to sudden drops in the market may be not to do anything.”
However, if you’re uncomfortable with 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.
3. 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 positions 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.
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.