Weekly Market Commentary
February 24, 2020
Risk on or risk off?
The coronavirus appears to have inspired two distinct schools of thought among investors. Some investors currently favor opportunities that are considered lower risk, like Treasury bonds and gold, because they’re concerned about the potential impact of the coronavirus on the global economy. Others are piling into higher risk assets, like stocks, that could benefit if central banks (like the United States Federal Reserve) take steps to stimulate economic growth, reported Randall Forsyth of Barron’s.
Currently, the Federal Reserve (Fed) is holding interest rates steady. The minutes of the January Federal Open Market Committee meeting indicated the Fed, “…generally saw the distribution of risks to the outlook for economic activity as somewhat more favorable than at the previous meeting,” reported Lindsay Dunsmuir of Reuters.
Last week, Fed Chair Jerome Powell said it was too soon to know whether the economic effects of the coronavirus on the U.S. economy would warrant a change in monetary policy.
During periods of uncertainty, like this one, the benefits of holding well-allocated, well-diversified portfolios become clear:
- By holding asset classes (e.g., stocks, bonds, and other asset types) that respond differently to the same market conditions, investors protect themselves from the poor performance of a single type of asset.
- By diversifying holdings within asset classes (e.g., investing in different parts of the world, investing in different industries), investors protect themselves against the poor performance of a single investment.
Choosing a well-allocated and diversified portfolio that aligns with your goals, objectives, and risk tolerance can help provide reassurance when markets are volatile. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.
Last week, major U.S. stock indices moved lower. Al Root of Barron’s reported, “The Dow Jones Industrial Average dropped 1.4 percent this past week, snapping two weeks of solid gains…The S&P 500 index dropped 1.2 percent for the week…The Nasdaq Composite dropped 1.6 percent on the week…”
The CBOE Volatility Index (VIX), known as Wall Street’s fear gauge, moved higher.