Bad News on Top of Bad News
Financial markets constantly process new information as it becomes available, and a fresh story over the weekend was heaped on top of the growing coronavirus uncertainty.
Saudi Arabia launched an oil price war with Russia, after Russia’s refusal to cut production. Combined with already weakened demand due to the coronavirus, the supply side shock sent the crude oil price plummeting over 30% this morning.
Low oil prices would mean cheaper gas prices for consumers, but there would be a significant negative impact on oil producers, drilling and production companies, and the massive U.S. shale industry. Already facing plenty of uncertainty, rattled stock markets around the globe dropped sharply (down 7%+).
While we now have two major clouds (oil and virus) hanging over the world economy and financial markets, the ultimate impact remains unclear. The possibility of a recession starting in 2020 seems more likely, which is why markets responded so severely. However, we should recognize that all recessions are definitely not the same.
The “Great” recession of 2008/2009 coincided with one of the worst financial crises in history. That was clearly an anomaly and not the standard. Excessive debt levels exacerbated the last recession, and the same is not true today.
The two recessions prior to 2008 lasted less than a year, and 5 of the past 11 recessions had double-digit stock gains
during
the recession. The markets and the economic cycle rarely coincide, so we can never be certain how stocks will fare. We do know, however, that markets can recover quickly as the sun breaks through the clouds.
It’s important to acknowledge once again that market declines come with the territory of stock investing. A 15% decline happens, on average, about once every two years. That’s the “risk” side of the dreaded risk-return equation. The reward comes from riding out the fluctuations to capture the long-term returns. It’s never fun or easy, but it’s been part of the investment experience from the start.
On the bright side, it’s another opportunity to offer kudos to those often-underappreciated bonds!
Please reach out with any comments or questions.
Warm regards,
The LPP Team
