Category Archives: Investment

Infographic: Is the coronavirus market drop the worst in DJIA history? Yes. And no.

Over the last couple of days we have seen steep declines in global equity markets driven by concerns related to the coronavirus (COVID-19). Since February 20, in particular, we have seen three large declines, including two drops of 1,000+ points in the Dow on higher market volatility. Markets don’t like uncertainty.

The 1,190.95-point Dow decline this past Thursday (February 27, 2020) is the largest we’ve seen in the history of the Dow and amounts to a drop of over 4.4%. However, when compared to the daily historical percentage-point drops in the Dow, it ranks around 100th in terms of percentage declines dating back to the 1920’s. The largest percentage decline in the Dow occurred on October 19, 1987, also known as Black Monday.  On that day, the Dow fell more than 500 points, which represented a decline of more than 22%, because the Dow was at about 2,200 at the time.  So while the 1,000-point drop is substantial, we need to put this into perspective in terms of the level of the Dow today and the percentage of the decline.

Factoring in the declines over six trading days last week (February 20 to February 27), we’re close to a 13% decline in the span of four trading days for the Dow (and S&P 500). This is a market correction (typically defined as a 10% decline or more). For perspective, there have been six market corrections since the recovery began in 2009 after the global financial crisis.

So what is driving the decline? 

Concerns and headlines related to the spread of COVID-19 and the level of containment as well as the accompanying uncertainty regarding this issue.

From the World Health Organization, it is reported that there are 83,652 cases (as of February 28, 2020) with 1,358 new cases reported in the last couple of days; at this point there have been over 2,700 deaths in China related to COVID-19. Cases have now spread to six continents.

As such, it cannot be predicted how this will play out in the near or long term nor what the overall impact will be on global economies. Some of the potential effects include: a reduction in travel, commerce slowing due to lower employee productivity and the disruption of supply chains, and the market generally trying to price in a reduction in expected corporate profits due to potential increased expenses. Given that, the bigger question is what the magnitude of these impacts will be.  Will supply chains have to be revamped and inventories built up?  Will production become more locally focused? Until we have a better understanding of these questions and how they could affect earnings, we expect to see elevated volatility across markets.

So what should I do?

While volatility will likely remain elevated, it is still within the range that is normal and expected.  Make sure your portfolio is positioned for the appropriate level of risk, which means up markets as well as down markets.  Make sure your portfolio is prudently diversified, which usually means owning both equities and fixed income.  And finally, make sure your portfolio is structured with the right time horizon.  Whether a pension plan or a 401(k), it’s unlikely you need all your money in the next few days.  Long-term investing can handle the ups and the downs. Make sure you have the right risk for your objectives and the best expert advice in your corner.

The analysis in this report was prepared utilizing data from third parties. Reasonable care has been taken to assure the accuracy of the data contained herein. These reports do not constitute investment advice with respect to the sale or disposition of individual securities. Past performance is no guarantee of future results.

Milliman provides a copy of its SEC Form ADV Part II to clients without charge upon request.Advisory Services are offered through Milliman Advisors, LLC a subsidiary of Milliman, Inc.

Reasons for optimism and risks to be aware of in the second half of 2017

So far in 2017, solid equity market returns, low unemployment, a growing economy, and low inflation point toward financial and economic health and offer reasons for optimism. Other indicators, however, sit near the high or low end of their longer-term ranges. Reversion to their respective means would have significant implications for investors. In this article, Milliman’s Joe Becker offers some perspective.

Inflation considerations for the post-recession market

Unanticipated inflation can adversely affect capital gains and fixed incomes. It is important for banks and other financial institutions to evaluate the prospect for future changes in price levels. In the United States, low inflation levels have created uncertainty surrounding the top-down policy measures that directly affect prices.

This Milliman Insight paper by Patrick Humes examines recent monetary policies that were employed to create inflation. It offers perspective on why these measures were not effective. Additionally, the paper outlines the proposed fiscal policies of the new administration and its prospect for increasing prices.

How did financial markets respond to Brexit?

Throughout the month of June leading up to the Brexit vote, the markets appeared to have trouble deciding which way the vote would go. Equity markets began to sell off during the second week of June as Brexit appeared to be increasingly likely. On June 14, as sentiment changed and the likelihood of Brexit seemed to be waning, equity markets started to climb back to early June levels. Markets were firmly higher on the day of the vote, exhibiting confidence that Britons would choose to stay in the European Union. As vote counts came in, currency and futures markets grew increasingly volatile with the rising prospect that Brexit would prevail. The next morning, equity markets opened sharply lower, displaying the characteristics of a classic gap event. Milliman consultants Adam Schenck,  Jeff Greco, and Joe Becker provide more perspective in this article.

Managed risk equities can reduce retiree loss aversion

Many individuals entering or nearing retirement encounter the risk tolerance paradox. They seek asset growth with an aversion to losses. This conflicting mindset prompts some investors to acquire low-risk assets when markets become volatile, essentially locking in losses while trading market risk for longevity risk.

According to Milliman’s Wade Matterson, “introducing managed risk equities into the portfolio of clients close to (or in) retirement can provide exposure to higher returns while managing the inherent higher risk.” He provides perspective on what investors should consider when using managed risk equities in his article “Solving the risk tolerance paradox for retirees.”

Money market amendment considerations

A U.S. Securities and Exchange Commission (SEC) amendment, which will take effect on October 14, 2016, has important financial implications for retirement plan participants and individual investors that own nongovernment money market funds. The amendment made to the Investment Advisors Act of 1940 (IA 1940) replaces the stable net asset value (NAV) for money market funds with a “floating” NAV.

In this article, Milliman consultant Jeff Marzinsky explains the SEC’s reasons for amending IA 1940. He also discusses how the amendment affects investors and retirement plan sponsors and provides steps people should consider to prepare for the new regulation.