While watching the stock market continue its coronavirus-fueled steep decline on Monday, Michael Joyce was reminded of a recurring joke on the popular 1970s television comedy “Sanford & Son.”
“Fred Sanford would grab at his chest and say, ‘This is the big one,'” said Joyce, the president of the Richmond-based financial planning and investment advisory firm Agili.
“I don’t think this is it,” Joyce said of the recent collapse in stock prices. His clients haven’t panicked either, he said.
“Nobody really knows with the coronavirus how it is going to ultimately impact the global economy and corporate earnings,” he said. “But it does appear to me that there has been some panic selling over the past couple of trading days.”
“I do understand it is a scary time,” Joyce said. “For people who have been around a while, they remember other scary times.”
As the coronavirus continued to prompt travel bans and factory shutdowns in affected countries, the Dow Jones Industrial Average sank 7.8% on Monday, its steepest drop since the financial crisis of 2008.
Stocks dropped so fast on Monday that it triggered the first automatic halts in trading in two decades. U.S. stocks are now down 19% from the peak they reached last month, edging close to a bear market, defined as a drop of 20% from the peak.
In this kind of market, investors should remember two things, said Joyce, who has been working in the financial industry for more than 35 years.
“Number one, it pays to be diversified,” he said. “Anybody who has a diversified portfolio has the downside mitigated.”
The second reminder is to keep the long-term outlook in mind. “This will inevitably pass,” he said. “The correction will run its course.”
Other financial advisers and market observers in the Richmond area sounded a similar refrain, urging investors to sit tight and resist the urge to flee the market.
For the typical investor, “as tough as it is, probably the best thing is to hold on tight and wait it out,” said Tom Arnold, a professor of finance at the University of Richmond’s Robins School of Business.
The Richmond-based financial brokerage Davenport & Co. told its clients in a weekly market report that uncertain market conditions are likely to persist for weeks to come as the gross domestic product and earnings growth expectations for 2020 are reined in.
“However, just as markets experienced similar sell-offs from prior epidemics, this too shall pass,” the firm said in its report. “As such, we view this as the time for patient investors to scale back into leading dividend growth companies possessing financial strength as well as differentiated products and services that are now trading at attractive relative valuations.”
Essentially, this market swoon could be a good time to buy stocks that have solid underlying fundamentals and pay good dividends, market watchers said.
“The short answer to whether this is a buying opportunity is yes,” Joyce said.
“It is a buying opportunity for investments that really are priced inexpensively now,” he said. “It is not a question of will the collapse go further but rather has the collapse to date caused securities to be priced right. If they are currently undervalued, it is a good opportunity.”
“But I would hasten to add that it should not come at the expense of diversification,” he said.
The price of oil also plunged nearly 25% Monday after Saudi Arabia indicated it would ramp up production as Russia refused production cutbacks in response to falling demand.
While falling oil prices hurt energy companies, they could help support the economy as declines trickle down into gasoline prices, Joyce said.
“People are going to pay less at the gas pumps, and they will have more disposable income,” he said. “It impacts the whole supply chain and makes things easier to distribute to the consumer.”
Dalal Maria Salomon, chief executive officer and founding partner of Salomon & Ludwin LLC, a brokerage practice in Henrico County, also said investors should avoid buying on greed and selling on fear.
After a 10-year bull market, investors “seem to have forgotten risk,” Salomon said.
Government intervention to create record low interest rates and stimulate the economy has forced investors to look elsewhere for both income and returns, driving huge demand for risky assets such as stocks, she said.
“So, now when the markets plummet and are volatile, suddenly, investors remember risk,” Salomon said, adding that risk needs to be addressed beforehand with a plan that protects an individual’s cash flow needs.
“This is a great time for investors to work with their advisers to get advice and guidance,” she said. “There is no one-size-fits-all strategy but having a well-thought-out financial plan that stress tests for markets like this and incorporates risk, cash flow and proper asset allocation is always a smart decision.”
“We have been advising clients for some time now that markets do not go up forever,” Salomon said. “It has been our premise that the reason for a decline is often something unpredictable. So although we had no idea that a virus would be the impetus for the market turmoil – it is not surprising.”
The “hype and hysteria” about the coronavirus “is incredible,” said Kent Engelke, chief economic strategist at Capitol Securities Management in Henrico.
“In my view, any type of positive coronavirus news can have a huge snap-back rally” in the markets, Engelke said.
Good quality stocks “should be able to weather the storm, especially those that are paying a dividend,” he said. “Rational minds will prevail but at this juncture fear is overwhelming rational thought.”
Engelke said the Federal Reserve may need to take further action following its surprise decision last week to help bolster the economy by lowering its benchmark interest rate by half a percentage point to a range of 1% to 1.25%.
Cutting rates by the Fed can only accomplish so much, said both UR’s Arnold and Manu Gupta, professor and department chair of finance, insurance and real estate at Virginia Commonwealth University’s School of Business.
“I would say cutting interest rates doesn’t seem to be a factor,” Arnold said. “That helps an overall economy that has a credit crunch. That is not what this situation is.”
The most impactful step that government should take at this time to quell the market panic would not be further interventions in the market, but confidence-building steps to protect public health, said Gupta, who said he is not touching his own investment portfolio right now.
“I think at this point, for the financial markets, what needs fixing is that we take good care of this infection,” he said. “What government can do to really help is make sure there are sufficient testing facilities, testing kits and sufficient quarantine facilities. That will put a calm in the mind of investors more than any financial interventions at this time.”