Good morning Stashers:
I want to give you our perspective on some of the news driving the markets today, and to answer some questions about what this means for you.
As people are trying to figure out the impact of the coronavirus on the global economy, the markets remain extremely volatile. Overnight, oil prices decreased by a huge amount, after Saudi Arabia drastically cut oil prices.
Here are a few questions I’ve received over the weekend:
What’s happening with oil prices? Shouldn’t the market like lower oil prices?
Prices of oil, like all things, are dictated by supply and demand. Last Friday, the Organization of the Petroleum Exporting Countries (OPEC), a group of the world’s biggest oil producers, and Russia—another big oil producer— failed to come to an agreement about oil supply.
As the world economy has slowed because of coronavirus, oil producers have wanted to offset the decline in demand by cutting oil production. OPEC wanted to cut its supply to help keep prices up. However, for various reasons, Russia refused to cooperate. Over the weekend Saudi Arabia decided to fight back and announced a massive drop in the price of oil and that they would not cut production. Right now we’re seeing the single biggest one-day drop in oil prices since the beginning of the Gulf War in 1991.
Cheaper oil sounds like a good thing, because it leads to lower gas prices for your car. But super-cheap oil can actually be a bad thing, because it makes producing oil more expensive.
So, why is the stock market down based on this news? Unfortunately the coronavirus outbreak is affecting the entire global economy. Economists predict that global growth will slow in the coming months, and thus the need for oil will continue to decrease as well.
While the massive drop in oil prices we’re seeing right now is made worse by the announcement of increased supply, it is another indicator that economic activity is slowing. Slowing economic activity can lead to lower earnings for companies, and thus lower stock prices.
Picking stocks is hard. What should I do with my money?
This is a difficult question to answer, because each person’s risk profile and financial situation is different. With that in mind, there are three things I like to tell people.
First, you can’t time a market when things are calm and the market is going up, and it’s even harder when things are volatile, as they are now. If you try to day trade, good luck to you. I try to zoom out and buy things I like for years, not minutes.
Dollar-cost averaging is your investment’s best friend right now. Turn on Auto-Stash, or add to your investments manually on a set period. For example, if you own a stock that you want to hold for the long term, adding a small amount of money every week or two will allow you to buy it at different prices. This is called dollar-cost averaging, and it’s part of the Stash Way. With the fractional shares on Stash, you can add as little as a few pennies to your investments on a regular basis.
Long-Term Mix, or any of the mixes, are great, diversified investments that contain a mix of stocks, bonds, and treasuries from the U.S. and around the world. These are typically investments that make up the core of your portfolio and when combined with Auto-Stash, are great for long-term investing. Stash offers Conservative, Moderate, Aggressive, and Long-Term mixes.
If you want to sit out of stocks right now and earn some yield (interest) on your money, Park My Cash, which you can find on the Stash app, is a lower-risk option. This is still an investment and the price will move, but normally it will move much less than stocks. You can also consider some of the bond investments on Stash including short-term, medium-term, and long-term bonds.
Will the market go back up?
Yes, but…as you’ve heard me say many times before, nobody can time the market. Please tune out whenever anyone tells you with certainty how the market will react in the near term. There is no way to predict what the market will do in any short period of time, especially during times like now when there is a lot of market volatility. As news continues to come out about coronavirus, investors attempt to absorb that news and judge how it will affect companies and the economy. Ultimately, stock prices, and thus the stock market indices, fluctuate based on how investors perceive earnings power.
Nobody has a crystal ball to say with any certainty what the news will look like, how that will affect the future, and what the “correct” stock price is. The market is usually incredibly efficient at absorbing news and is a best measure of current expectations. These expectations can change on a minute by minute basis. That’s why at Stash we try not to predict. We don’t know what the future will bring and we can’t say whether the stock market will be up or down tomorrow. However, we do know that stock prices tend to go up over time, and this is the time to remember the Stash Way!
What’s going on with interest rates? They keep dropping.
It’s complicated, but the Federal Reserve (the Fed), the nation’s central bank, has cut something called the federal funds rate, which forms the basis for a lot of lending, including rates for credit card loans and some types of mortgages. The Fed cut this rate recently in response to falling markets, essentially as a way to make lending cheaper, which in turn can make businesses stronger.
But the rate on the 10-year Treasury, a benchmark government bond that’s typically a haven for investors, has also fallen to record lows, reflecting what’s going on at home and in the global economy.
We have our amazing writers on this now and will be back over the next few days with some great education on this topic.
I hope you and your loved ones are staying healthy and safe, and we wish you a great week ahead.