UPDATE – Coronavirus and Oil Prices

Today, Monday, March 9, 2020, U.S. plunged more than 7% at the open, triggering a trading halt for 15 minutes in a move designed to limit panic. This morning’s selloff was triggered over the weekend by a free fall in oil prices as Saudi Arabia and Russia failed to agree on production cuts in an already over-saturated oil market. We want to highlight a few important things today.

First, now is not the time to panic, sell, or make emotional investment decisions. We invest client assets into diversified portfolios appropriate to each client’s specific risk tolerance and with a long term time horizon. That is why we give you a risk tolerance questionnaire when you first open your account so we can gauge what level of volatility you can handle when days like today happen. We invest proactively. We don’t react to the market. If we need to make a move, we do it before the market moves, not after. Once the market is moving, like today, we are all strapped in for the ride. Like a roller coaster, you get to pick your seat (your portfolio) in the beginning, but once the roller coaster exits the station, you strap in for the ride. We try to pick the best seat on the roller coaster for you from day 1 when you open your account with us, based on the amount of risk you are comfortable with. If you try to get off while the roller coaster is in motion (like selling during a market panic), you’ll fall 100 feet, and we don’t want anyone to do that! It may be a wild ride, there may be huge dips, but eventually, the ride ends and the roller coaster is back in the station. All you have to do is hold on. If you sell right now, you are joining the panic, following the herd, selling low and most likely buying high, and when the market eventually bottoms and recovers (which it will), you will miss out on that, and probably fail to recover your losses. Recoveries are just as hard to predict as the initial market shock so don’t be fooled into thinking you or anyone else knows when to get back into the market.

Second, what can you expect? In the short-term (0-6 months), you can expect high volatility, sharp selloffs, and just as sharp, relief rallies. You may see the market drop 5% in a day, for example, and then the next day, rally 5%. You may see the markets drop 20% or more off the highs in February. These moves are going to be highly random, very fast, unpredictable, like an earthquake. We always try to emphasize to our clients that we really can’t predict earthquake-like events or their effects. All we can do is make sure you have a well-diversified portfolio you can hold onto when these events do happen. On the bright side, you can expect gas prices to drop significantly. In the medium-term (6-12 months), we could see the economy slow down or go into recession, however, it has only been two weeks since this Coronavirus outbreak started having any affect on U.S. markets so it is too early to tell. The leading economic indicators actually looked very good in January but February data will not be available until March 19. In the long-term, eventually this Coronavirus outbreak will end. The market will recover, get back to the previous highs we saw in January, and then keep going…as it always has done throughout history. Looking at history, the Spanish flu killed an estimated 50 million people between 1918-1921. The Dow Jones dropped about 47% from 1919-1921. It looked very bad at the time. But guess what? As bad as it was, it eventually ended, and the period that followed was called the “Roaring 20’s”, for very good reason. We can’t predict how long it will take, how low the market will go, but in the end, it has always recovered and kept going.

Here To Help
Please reach out to us if you have questions about anything in this piece, or if you want to review your risk tolerance. We have you answer risk tolerance questionnaires when you open an account with us for a very good reason and you are seeing that today. All investors have to take risk if they want to earn returns, but how much risk you can tolerate is the important question. Our goal is to give you a diversified portfolio at the risk level you can handle both financially and emotionally so that when these negative events occur (as everyone is experiencing now), you can withstand the volatility. If you can’t withstand the volatility, contact Dion Padilla so he can review your current portfolio allocation, your stated risk tolerance as you indicated when you opened your account, talk through your emotions, and settle on a solution appropriate to your situation.

Questions

If you have any questions or would like to learn more about our wealth management services and investment strategies, please contact us at (210) 223-8700 or via e-mail at dion@padillawmg.com

Written by Nathan Ramos, Chartered Financial Analyst®

The information and opinions herein are for general information use only. Padilla Wealth Management does not guarantee their accuracy or completeness, nor does Padilla Wealth Management assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Past performance of an index does not guarantee future results. Indexes are unmanaged and cannot be invested in directly. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.