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Charter Oak Update on Global Markets

As our readers know, fears about the coronavirus outbreak led the S&P 500 index into a correction (a 10% or more drop from a recent high) in a matter of days last week. This week has seen more stock market volatility. The market went up on expectations of government stimulus and US political news, and down as anxiety about the virus and its economic fallout dominated headlines.

Our monitoring of conditions and capital markets remains elevated and vigilant. We are analyzing new data and information as they materialize. As we wrote last week, periods of heightened instability and uncertainty in the markets are rarely opportune times to instigate dramatic portfolio alterations. We are writing to keep you apprised our thinking as this evolves.

It is important to remember that market downturns and bouts of volatility are not rare events, and have been related to health crises such as SARS in 2003 and Zika in 2016. While our rational brains can understand this fact, we know it is still unsettling to witness portfolio changes that represent very personal goals.

Below are three things we’d like you to keep in mind as this situation unfolds:

1. Fear is a natural reaction – we’re hardwired for it. In this situation, there’s the virus and the market reaction that can cause financial loss.

Regarding the virus, all we can do is take appropriate precautions and trust that researchers and science will find a way to help us understand and live with this threat.

Regarding the markets, we can control our responses by zooming out and focusing on the long-term big picture. Remember that your investments are designed to support your long-term objectives. We believe the best response is to acknowledge what you’re feeling and reach out to us if that would be helpful.

2. We are monitoring the situation and will make adjustments when appropriate. These situations may create opportunities for adjusting your portfolio and shifting your asset allocation and risk exposure. Rebalancing your investments means selling one investment and buying another, which can help control risk and buy into opportunities.

3. Be prepared emotionally for more volatility. Markets can recover more quickly than you might think, but stocks may also take days, months or even longer to regain losses. And as we wrote last week, roughly 85% of current financial markets include trades triggered automatically by algorithmically driven computers. These computers start selling (or buying) indiscriminately when “technical levels” are reached, triggering volatility on the downside and upside. Thus, short-term market movements are heavily influenced by fear and computerized trading, but long-term market movements tend to reflect broader-based economics. As investors, we must focus on the benefits of sound, long-term investing.

What is most puzzling for investment advisors today is how deeply mankind will react to this virus; how much will “hunkering down” disrupt product demand and supply. Secondly, how aggressively will governments around the globe respond and spend, to stabilize their people, and their economies. Currently, our research suggests that government intervention is inevitable, unpredictable, and necessary. The amount of “fear” in the system as measured by a flight to safety, government bonds, is higher by 40% than any other period in recorded history. Bond prices are higher than periods of World War’s, the 2008 economic collapse, and any other world event over the last 100+years. This fact alone supports our theory that the fear and panic that has set into the human psyche is likely overdone, and with some positive news surrounding the outbreak, markets are likely to quickly stabilize and return to elevated levels.

Take care, and rest assured that we are working with unprecedented diligence toward your financial well-being. Please feel free to reach out to your advisor should you want to learn more or talk about your situation.