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Staying the Course – Coronavirus and Stock Market Volatility

According to the CDC,1 the recent coronavirus (COVID-19) outbreak has claimed almost 5,000 lives and impacted nearly 132,000 people worldwide as of March 12th, 2020.  The numbers are sure to grow and we are starting to see the impact of school and work closures on everyday life.  The pandemic has also injected a sense of uncertainty into the markets. If you’re invested in the stock market, you likely have found yourself sitting on the edge of your seat over the last few weeks as market volatility has increase. 

We are here for you and we want to take a moment to update you on our thoughts related to the coronavirus, its impact on the financial markets, and, ultimately, on your personal financial situation.

A Brief History Lesson 

The market’s negative response to health crises is nothing new and will continue to be the norm for future crises. What can get lost in all of this is that markets are resilient and tend to recover relatively quickly. The below table shows that for crisis occurring since 2003, the S&P 500 bounced back by an average of 10.47 percent by six months after the initial outbreak. After 12 months, it rebounded by an average of 17.17 percent. Of course, we don't know how markets will perform this time around, but with history as a guide, we expect a similar pattern. 

Epidemic Month-end* S&P 500 6-month performance S&P 500 12-month performance
SARS Apr. 2003 14.59% 20.76%
Avian (bird) flu Jun. 2006 11.66% 18.36%
Swine flu (H1N1) Apr. 2009 18.72% 35.96%
MERS May 2013 10.74% 17.96%
Ebola Mar. 2014 5.34% 10.44%
Measles/Rubeola Dec. 2014 0.20% -0.73%
Zika Jan. 2016 12.03% 17.45%

Source: Dow Jones Market Data, cited on MarketWatch.com February 24, 2020. 

*End of month during which early incidents of outbreak were reported

Why is it important to take a look back in time? While there are no guarantees the current situation with COVID-19 will follow a similar pattern to the above epidemics, it helps us to better understand and put into perspective that historically over long periods of time, despite an epidemic, stocks typically regain their upward trajectory. To paraphrase Mark Twain, history doesn't repeat, but it rhymes. 

Market Psychology

As we discussed above, all assets rise and fall in value across time and the more extreme the swing, the more visceral the reaction. Overcoming this market psychology is no easy feat but learning how the market works can help to reduce stress and increase your ability to “stay the course." Of course, having a plan in place and sticking to it is one of the best ways to weather the storm. 

Your investments are designed to support your long-term objectives, not today’s needs. (For clients who have short term needs, we have already taken steps to ensure liquidity in preparing for just such an event.)  In situations like this, it is important to have perspective and remember that swift market drops are not unusual. Of course, the headlines are scary and fear of the unknown is scariest of all, but the nature of the market is that it will go up and down. That is just par for the course. 

We believe the best response is to acknowledge what you’re feeling, reach out to us if that would be helpful, and have confidence that we are actively monitoring the situation. And always keep in mind that in the short term, market movements can be heavily influenced by headlines and computerized trading, but in the long term, markets tend to reflect broader-based economic trends. One of our most important roles as your trusted partner is to not let the difficulties of the short term prevent the reaping of potential benefits of sound, long-term investing.

What Should You Do? 

The answer is simple: Don’t panic. 

Sure, fear is a natural emotion to encounter during turbulent times. This is especially true when we are staring at a health epidemic for which we have no direct comparison and which will surely impact both your health and your finances at least in the short term. When market corrections occur (classified as a drop of 10 percent or more in one of the major U.S. stock indexes) or bear markets begin (classified as a drop of 20% from the prior high) the media tends to add fuel to the fire. It’s important not to make any alarm-induced moves during a correction. Instead, stay vigilant and stay the course. And, if you can, turn off CNBC and avoid looking at your portfolio on a daily basis. It will only create greater anxiety as we work our way through the volatility ultimately reaching a more stable situation as concerns dissipate. 

Importantly, we should acknowledge that investing in the market is not just about winning and losing – it’s about strategy and duration. The virus and how it spreads is completely out of our control, but our reaction to the performance of the financial markets is something we can control. It’s not fun seeing your portfolio drop, but at the same time, we know market volatility is normal and expected. The key is to “zoom-out” and look at the long-term big picture. If you can, make sure to maintain your normal routines, including exercise and healthy eating. Also, take some time to get outside as research shows that walks in nature have a host of beneficial effects on the human mind and body. 

What We’re Doing

What we do know for a fact is that the market will continue to do three things: It will sometimes go up, it will sometimes go down, and sometimes it will barely budge. The other absolute certainty? Your financial well-being is our number one objective. Rest assured that we are closely monitoring the situation as it unfolds and recommending actions as appropriate. 

And we will leave you with one final piece of good news: sometimes, situations like this can actually create opportunities. For example, as prices drop, we will also seek out opportunities to “rebalance” and shift your asset allocation if it aligns with your long-term goals. Shifting course mid-stream is generally a terrible strategy, but taking steps to reinforce a strong plan that is already in place can pay big dividends. 

If you have any questions about your specific situation, please contact us. We are here to help and we are here for you. Thank you for your continued trust and confidence.

  1. https://www.cdc.gov/coronavirus/2019-ncov/cases-in-us.html

This content is developed from sources believed to be providing accurate information, and created in conjunction with Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.