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Financial Literacy

How to Handle a Market in Chaos

The market is in chaos.

It has had outsized moves nearly every day since February 19.

The coronavirus is scary stuff. Because it’s so easily transmitted, even from people who show no symptoms, it could prove very tough to avoid.

And aside from the human toll, which is frightening enough, the economic impact could be tremendous.

The travel and events industry is getting annihilated as people cancel trips and conferences. The ripple effect from people holing up in their homes is likely to be significant.

Consider…

  • The airline industry could lose out on between $63 billion and $113 billion in revenue.
  • The Organization for Economic Cooperation and Development said global growth could be cut in half if the virus continues to spread.
  • Gross domestic product growth will be slowed by 0.1% to 0.3% in the United States in the first quarter, according to the U.S. Chamber of Commerce.If we start to see events canceled and things shut down in America, I suspect that estimate will be way too low.

Adding to the market’s misery is the perception that the federal government does not have a handle on the situation.

Reports of quarantined people who are unable to get tested, leaders who can’t get their facts straight and the politicization of the virus are ratting confidence.

That lack of trust in our leaders makes people more scared and investors more likely to panic and hit the “sell” button.

The problem is what to do with the cash after you’ve sold…

One of the most important stories not being talked about right now is the crash in interest rates. Two months ago, a 10-year Treasury yielded an already ultra-low 1.8%. Today, it’s a third of that rate.

In fact, just in the last two weeks, the rate plunged more than eight-tenths of a percentage point below the previous record of 1.33% in 2016.

It was a surprise move from the Fed last week to cut rates by half a percentage point. The market expects another similar move shortly.

This is further evidence that the government has no idea what it’s doing. Prior to the outbreak, markets were at all-time highs and the economy (if you listened to the government and pundits) was very strong.

Yet after a two-week shock to the system, the Fed is taking drastic measures to try to spark the economy when we don’t yet know how or even if it’s sick.

It’s like using a defibrillator on someone who called in sick because of a chest cold.

Interest rates were already near record lows before the Fed cut. No one is going to buy a home now because of low rates if they weren’t planning on it two weeks ago. No CEO is going to decide to build a new factory tomorrow if they didn’t expect to last month.

So now that interest rates have been crushed, what do you do about it?

  • Buy certificates of deposit (CDs). Look for some CDs with a decent interest rate that you can lock in for a few months. Rates could move back higher… or they could go to zero.If you can earn 1.5% or higher for three to six months, that’s probably as good as it’s going to get for a little while.
  • Buy quality dividend stocks.  Dividend payers went on sale these past two weeks. And those juicy yields look even more enticing now that interest rates are insanely low. You can own quality companies with impressive yields a lot cheaper than you could have a month ago.
  • Don’t panic. Chaotic markets are scary. But you should remember that they happen from time to time. Over the years, the market has seen all kinds of terrible things – wars, scandals, assassinations, terrible presidents and Congresses, etc. – and the market went up over the long term regardless of those things. And in all of those cases, you usually didn’t have to wait long for a rebound. The last bear market lasted less than a year and a half.

We’ll be out of this mayhem market soon. These things don’t last forever. The important thing is not to make emotional decisions about your finances when you’re worried about something else.

Chaos isn’t fun. But it will likely present opportunities in the future.

Good investing,

Marc


About

A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.

 

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