Altium's Comments on March 2020 Market Volatility
We want to provide a brief update on yesterday’s market activity. The S&P 500 index fell sharply on the heels of COVID-19 updates from around the globe and reports of an oil price war escalating between Saudia Arabia and Russia. When the market opened Monday morning (3/9/20) trading was halted for 15 minutes after the S&P 500 index declined 7%. Further, as demand continues to grow for U.S. Treasury bonds, yields have fallen sharply and the 10-year U.S. Treasury bond is currently yielding roughly 0.7% (at historic lows). We expect the Federal Reserve and U.S. Government to provide additional monetary and fiscal stimulus to try and combat the economic impact, but any impact from those actions is not likely to be immediate.
Yesterday’s negative move in the market arrives in the aftermath of an extremely volatile previous week, in which the market moved wildly in both directions. The current level of market volatility is certainly unsettling, but it is not unprecedented. While investors attempt to digest the flurry of news and assess the impact to global economic growth, we will keep you informed as matters evolve. More importantly, as it relates to your individual plan, we wish to emphasize once again the importance of sticking to your long-term strategy.
We would like to provide some context around this volatility and current market valuation;
The line graph below represents the forward looking Price to Earnings (P/E) ratio of the S&P 500, from 1990 to today (P/E is a ratio used to measure the value of stocks). Prior to the market sell-off which started a couple weeks ago, the S&P 500 index had surged to peak P/E multiple levels (~18X) when compared to the past 30 years. The average P/E ratio during this period of time is roughly 15X and based on current prices, we are now just below this average level. That being said, valuation will stay in focus as companies begin to report first quarter earnings and discuss their near-term outlook. We believe this is important, as investors will seek metrics to support market prices. 1
The graph below highlights the price movement of the S&P 500 index (green line) and its volatility index (VIX – blue line) over the past two years. If you recall, the S&P 500 index sold off roughly 20% towards the end of 2018 and volatility spiked from relatively low levels. As volatility subsided in 2019, the stock market continued its rally, gaining nearly 30% off its lows. As of yesterday’s close, the index is down roughly 19% from its peak in February and the sudden spike in volatility is similar to that experienced in 2018. We point this out to emphasize that market volatility is normal and to be expected. 2
We anticipate this elevated volatility to continue and understand that market volatility can be unsettling. We are closely monitoring the situation and will continue to share our perspective. If you would like to further discuss the current state of the market, please let us know.
Gregory Slater, CFA, CFP®, CIPM®
Chief Investment Officer
1 - Source: Bloomberg: S&P 500 Index forward 12 month Price to Earnings ratio;
2 - Source: S&P 500 Index & VIX index.
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