A Rapid Drop in the Price of Oil Adds to the Economic Uncertainty
Over the last couple of weeks, volatility in global stock markets has spiked higher, with extreme up or down movements occurring on almost a daily basis. These swings in market prices have been driven by fears about the global economic impact of the growing coronavirus epidemic. Global coronavirus infections recently topped 110,000 with Italy announcing containment measures impacting a quarter of its population and more U.S. states declaring emergencies.
This week, investors are also dealing with another shock to global markets as oil prices are experiencing their largest one day drop since the early Gulf war in 1991. The cause for the drop was news over the weekend of talks breaking down between Russia and OPEC to further cut production to support prices. As a result, Saudi Arabia began offering its crude oil at steep discounts and announced plans to increase production.
Last week provided yet another reminder of why it is never a good idea for long-term investors to attempt to guess when it is best to sell out of their stock positions, and then guess again when it is time to buy back in. After falling over 11 percent the prior week, last week the S&P 500 Index of large-cap U.S. stocks started with a gain of 4.60 percent. That was followed by a large down day on Tuesday, then another large gain on Wednesday. The week then finished with two consecutive down days. However, the index was actually up for the week, posting a gain of 0.65 percent.
Panic selling, or panic buying, on any particular day puts investors at risk of facing a sudden reversal. Over time, history has proven that investors are better off avoiding this type of market timing.
It is still uncertain how much the slowdown from lower consumer activity and plunging oil rates will hinder economic growth. The stock market may have more to fall as investors deal with the probability of substantially reduced growth in 2020. However, the US economy was in good shape when the coronavirus scare began. Historically, economic activity has bounced back quickly after severe health-related scares. When the fears subside, consumers will also benefit from the additional spending power which results from the drop in energy prices. So the best approach for long term investors is to maintain a well-diversified portfolio that includes investments that may be able to weather a downturn and not to try and time market movements.
The information included in this document is for general, informational purposes only, and is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.