Global markets have tanked as the novel coronavirus spreads, leaving stock and real estate investors in Colorado Springs scrambling for safety — and answers on what they should do with their money.
The sudden bear market has the U.S. and global economies fast approaching a recession, despite the Federal Reserve slashing interest rates close to zero — the second such emergency rate cut in two weeks.
“While economic data for March is just starting to be released, the severity of the blow from the coronavirus leads us to believe that the U.S. is entering recession — if not already in one,” S&P Global analysts announced March 17.
Citing the impact of social distancing on consumer spending and a “knockdown effect” on business investment, combined with an oil price hit on capital investments in energy infrastructure and expanded travel bans, the analysis predicts the economy could shrink by 1 percent in the first quarter, with a massive 6 percent drop in GDP growth in the second quarter, signaling a nationwide recession.
While the White House weighs a stimulus package reportedly between $850 billion and $1.2 trillion, allocating money for small business loans, stabilization funds, tax deferrals and cash payments to Americans, no one knows how severe the pandemic’s economic fallout will be.
The Business Journal spoke with local experts in the stock and housing markets about the impact on Colorado Springs and how investors should deal with extreme market volatility.
STOCKS AND BONDS
This month’s unprecedented uncertainty has local financial advisers like Kevin Sullivan, branch manager for Springs-based Sullivan & Associates, fielding calls from panicked clients.
And while his advice differs depending on individual financial circumstances and investment time horizons, Sullivan said he’s cautioning all his clients not to make decisions based on fear.
“The worst thing that people can do is react emotionally,” Sullivan said. “And the emotional thing is to say, ‘Ah, my 401(k) is down! I should sell it right now.’
“But that’s the worst thing you can do, because you’re going to be selling at the lows. You’re going to lock in your losses. And you can’t time the market — nobody can. So if you sell all your stocks right now while the market’s down, to wait until things feel better, by the time they do feel better the market is already going to come back up — and you’re going to miss that upswing.”
Sullivan said the market segments hardest hit by COVID-19 are those that are directly affected by social distancing.
“So obviously airlines, the hospitality industry, cruise lines — they all have suffered,” Sullivan said.
Also hurting the markets in general is an ongoing price war for oil between Saudi Arabia and Russia.
“That’s really hit all the energy stocks — anything regarding oil and gas,” Sullivan said. “But the thing to remember is cheaper oil tends to be a benefit to the overall economy. So we all save some money at the pumps, and airlines and cruise ships — not that they’re moving a lot right now — buy fuel. So that’s a positive thing and I think that’s probably going pass this summer, too, as oil most likely will come back up.”
During a bear market (typically defined by a decline of at least 20 percent over two months or more) Sullivan said the investments that traditionally do well are those with a lower associated risk.
“Things like bonds, of course, and in some cases gold — though gold has not done particularly well during this period of uncertainty,” Sullivan said. “Bonds act kind of like shock absorbers for your portfolio. You still can lose money in bonds, but they certainly smooth out the ride, so to speak.”
When it comes to other forms of investing, particularly in the stock market, Sullivan said whether an investor should or shouldn’t take risks largely depends on their risk tolerance — meaning their emotional capacity to handle the ups and downs — and their risk capacity, meaning how much money they have and how soon they need access to it.
“If somebody has significant assets and they’re not going to need it anytime soon, then they can potentially start to look at some stocks or other things as the market continues to be volatile,” he said.
“Somebody who is right at retirement and maybe didn’t save quite as much as they should — and unfortunately, a lot of Americans have struggled saving money for retirement — they can’t take that risk.
“So if they’re sitting on cash, I wouldn’t say to go back into the stock market right now, because who knows when it’s going to come back? I personally think it’s going to come back later on this year, to some extent, but nobody can guarantee that.”
While markets continue to struggle, Sullivan said his general advice for retired folks is to stay the course, but ensure they have enough cash on hand to last them about the next year.
For younger investors, and for those considering investing for the first time, he said his general advice is to at least keep contributing to their existing 401(k)s or other retirement plans.
“I think if you’re a 20-something and you want to save for retirement, now’s a great time. Everything’s a lot cheaper than it was even even a month ago. And I don’t think that this is something we’re going to deal with over 20-30 years,” Sullivan said. “So turning on your 401(k), maybe upping your percentage to defer in your 401(k), making sure you’re getting the most out of your company match right now — those are all great things for long-term financial planning for folks.
“Don’t panic. Just keep on buying because you’re buying everything on sale.”
THE HOUSING MARKET
Rich List, vice president of production and senior mortgage loan originator for Pentrust Mortgage Group, said the past two weeks have been an “extremely wild ride” for the nation’s mortgage-backed securities.
“Starting about two or three weeks ago, when the stock market started to go through its rumblings, we saw a big drop in the 10-year yield through treasury bonds,” he said. “Treasury bonds are what generally move mortgage rates long term and so we started seeing rates drop quickly. We dropped from the middle 3s, to the low 3s, to high-2 percents for the 30-year mortgage rates.”
Pentrust began to see a massive influx of mortgage refinancing because of the drop, List said, which quickly caused issues with supply and demand.
“There were a lot more folks in the market who were looking to refinance their mortgages than there was the ability for the industry to do that,” he said. “So in general, the mortgage industry is about a $3 trillion industry nationwide — and about two or three weeks ago, we had 10 or 11 trillion mortgages that wanted to be refinanced. So with the supply and demand issue, we saw a quick uptick in mortgage rates at the end of last week.”
Then on Sunday, the market was thrown for a loop yet again.
The Federal Reserve cut its overnight lending rate to near zero in an effort to stimulate the economy by making it cheaper for people to borrow money from banks for mortgages and other high-cost goods.
“Most people know this, but some don’t, that the overnight lending rate is not necessarily tied to mortgages, but it is a byproduct that generally does impact the market,” List said. “And so over the last couple days we’ve seen a big downtick in mortgage rates again, which seems to be spurring a lot of activity.
“Yesterday we had near-record day in rate locks both for purchases and for the refinance business and today it looks like we’ll be a busier than we were yesterday. We set one-day records on locks probably four or five times over this past couple-week period since we’ve been talking about the coronavirus.”
With rates so low, List said it’s a great time for homeowners to look into refinancing, even those who’ve only owned their homes for a short time.
“I think right now there’s going to be millions of people are trying to refinance — and for good reason,” he said.
“Hopefully this will be one of those small benefits of what’s going down, is that people can hopefully drop their payments and put the money back into other things in the economy.”
While current rates have sparked a boom in refinancing, they’re unlikely to cause any significant uptick in home purchases in Colorado Springs, List said, largely because there’s scant available inventory.
“Part of this refinancing does make me nervous,” List said. “If all of a sudden you have a two-and-three-quarters percent rate on your mortgage, that’s going to encourage you even more to stay — and part of our issue has been that people just aren’t moving.”
Though the market has fluctuated widely day to day, List said it seems that the mortgage market has begun to stabilize — at least for the time being.
“Personally I think rates are going to be very low. I think they’ll probably even be slightly lower than they are today and I think they’ll probably, more or less, maintain at those levels assuming nothing else crazy happens that we don’t know about,” he said.
“Generally speaking, mortgage rates are low when the economy is doing poorly. I think we can all assume that, if we’re not in a recession today, we’re going to be really close to it.
“But I have been very excited to see the amount of activity and the amount of people that do seem to be going about their normal lives. I guess we’ll just have to see what it brings — because if more people start getting sick, then obviously that can change quickly.”