Major US indices closed at all-time highs on February 19 as the market largely shrugged off any indication that the coronavirus would impact global financial markets. By February 28, South Korea, Italy and Iran had reported mounting cases of the coronavirus, sparking fears that the spreading virus would affect the global economy. The S&P 500 closed with its worst week since the 2008 financial crisis and markets worldwide were in the red.
Days later, stocks rebounded sharply on 2 March and the Dow Jones Industrial Average surged 5.1%. The rally proved to be brief as stocks tumbled the very next day following the Federal Reserve’s surprise interest rate cut. In a surprising twist, stocks yet again surged on 4 March as investors warmed to the Fed’s emergency rate cut and reacted to former US Vice President Joe Biden’s key primary victories during Super Tuesday.
What does this roller coaster of market ups and downs show? It illustrates the impossibility of timing the market and the challenges of emotional investing: selling when markets are falling, and paying too much attention to the short-term noise in the markets.
What happens next?
Will we see the market correction (generally defined as a market decline of more than 10%, but less than 20%) continue in the coming weeks? Or will we see yet another rebound? As events of the past week have shown, there is no way to say for sure.
While it is reassuring that the Fed seems to be proactively getting ahead of any weakness in economic data via the half a percentage point rate cut, the fact is that there is not much room for further cuts with interest rates currently hovering just below 1.25%. In Europe, short-term interest rates are already negative, so the European Central Bank has far less ammunition to lower interest rates.
Although uncertainty around the economic implications of the coronavirus outbreak remains, early economic data shows that the US economy’s fundamentals remain strong. Governments worldwide, including the US, have also signalled a willingness to support their economies. Singapore has unveiled relief measures targeted at businesses most affected by the virus outbreak while Chinese policymakers have implemented a raft of measures to support its economy. Even so, markets could still experience bouts of short-term volatility ahead.
How Syfe managed clients’ portfolio risk amid market volatility
Syfe’s dynamic risk management algorithm, ARI, focuses on ensuring a client’s portfolio risk is maintained within a designated risk corridor. ARI continuously monitors all portfolios and adjusts a portfolio if the risk level assessed significantly deviates from the client’s chosen Downside Risk level.
In other words, ARI does not react to price movements per se, but rather to forecasted market risk. A fall in the market will not trigger a rebalancing unless ARI detects a sustained increase in market volatility that threatens to breach a client’s chosen Downside Risk level.
During the worst days of the late February market sell-off, the rapid increase in market volatility prompted ARI to act by rebalancing client portfolios – reducing the proportion of higher risk equities and increasing the proportion of lower-risk bonds and gold – back to our client’s target Downside Risk.
By keeping portfolio risk from increasing beyond a client’s Downside Risk limit, ARI’s rebalancing helps mitigate losses and ensures portfolios are more stable even if stock market prices continue to swing. When clients know that their portfolio risk will always be kept in line with their chosen Downside Risk level, they are less likely to react emotionally and instead, feel confident enough to stay invested throughout the volatility. It’s worth noting that while the S&P 500 dropped roughly 10% during the SARS outbreak, it finished up more than 26% by year-end.
Keep your long-term investment goals in mind
Warren Buffet’s two famous rules to investing are first, never lose money, and second, don’t forget rule number one. Syfe believes that judicious risk management is key to helping investors earn better returns in the long run by not losing money beyond their risk specification so that they can maintain their resolve to stay invested for the duration.
Our ARI algorithm is designed to manage risk such that investors can be certain, with a 97.5% probability, that they will not lose more than their chosen Downside Risk level in a given year. The longer you’re prepared to stay invested, the greater the chance your investments will yield positive returns. In times of market volatility, keep your emotions in check, reassess your comfort level with your chosen Downside Risk level, and stay invested. Our dedicated financial advisors are also on hand to provide guidance and support to help you stay on track.