By Scott Kubie
Stocks fell sharply this week as the world responds to the coronavirus (COVID-19).
By the close of the U.S. market on Thursday, the S&P 500 had fallen 12% from its high set only six days earlier. It was the most rapid correction in history, defined as a decline of at least 10% from its previous high. At the opening of the markets on Friday, the selloff continued.
While there is no way to fully predict what will happen next, it’s important to remember the goals of your investment portfolios. Long-term investments face volatility, and to pursue your long-term goals, it’s vital to not overreact to one day, one week or even one month of market movement.
What’s Happening
Nearly 83,000 people in at least 46 countries have been infected with the coronavirus, with 2,800 reported deaths, according to the World Health Organization.
The U.S. and global economies are in a selloff as concerns over a slowed global economy increase. Health and safety problems affecting China and moving into Europe and southeast Asia have created a delay in production and increased trading concerns.
Demand is being curtailed as people cancel travel, minimize trips out and take other steps to reduce the risk of contracting the virus. As factories tell workers to stay home, key elements of the global supply chain reduce or eliminate production to protect employees.
The market reaction to the coronavirus has taken a sharp turn over the last few weeks. Stock markets had been in rally mode since the beginning of February as investors’ concerns about the virus abated for several weeks. New case growth had slowed, and more workers were returning to their jobs. The S&P 500 hit an all-time high as recently as February 19, before dropping the rest of last week.
Keep Your Portfolio in Perspective
The long-run effects represent a more challenging unknown. The virus may delay a recovery in manufacturing and business spending. If the virus returns next winter, similarly to the flu, it could reduce demand for travel. To combat the risk of viruses, global manufacturers will likely source material from a wider geographic area, so additional outbreaks will have a lesser effect on the ability to produce goods.
Regardless of where the market is headed, orient yourself in history. Corrections are a part of investing and bearing risks like this one is one reason equity investing has been profitable in the long-term. The last 12 bull markets produced an average return of 164% with an average duration of 54 months. We don’t know if this decline will make the list, but you can see that the markets have been through difficult phases and recovered several times.
Where Do We Go From Here?
We will continue to monitor portfolios and markets.
As we wrestle with the human costs and their financial consequences, there are four key points to keep in mind:
- Markets react swiftly to new information. This means investors should prepare themselves for big swings in the market in either direction.
- The longer the crisis lasts, the greater the impact. We are watching closely for reports of financial difficulties in companies not capitalized for a long period of reduced sales.
- Governments and central banks will likely step in to prevent particular financial difficulties from spreading throughout the economy. Central banks can cut rates and infuse banks with cash. Governments can adjust laws and rules to prevent bankruptcies related to the virus.
- Historically, viruses run their course, and much of the lost production and consumption bounces back. First, the disease must be controlled.
As the market swings higher or lower, remember to think about your portfolio in percentages rather than points or dollars. One-thousand-point moves in the Dow aren’t as big a deal as they were when the index was at half its current level. After more than a 30% increase in the S&P 500 last year, investors should keep a 10 to 12% decline in proper perspective.
Monitoring the Virus
The world continues to struggle with containing the coronavirus even though the disease seems to be spreading more slowly in China. Assuming the measures taken in China continue to modestly improve the situation, there are other factors we are watching closely to gauge the impact on the global economy.
Global Spread
Measures to prevent the spread of the virus generally slow economic growth. It’s important to note that 95% of all reported cases have come from China since the discovery of the virus.
However, the number of cases in South Korea and Italy both spiked last week, and Japan has canceled school for a month. Iran has a relatively low number of reported cases, but it has experienced the second-highest death toll of any country, raising questions about how the accuracy of the number of Iranian cases. The spread of the disease to the U.S. increased investor concern.
If the virus continues to spread to other countries, economic consequences will likely expand with it.
Work Stoppages
Another key factor is the pace at which workers return to work and production is able to ramp up. Some Asian airlines are forcing workers to take unpaid leave as demand has shrunk. Many Chinese employees are working from home, and factory production remains stalled from a shortage of workers in the supply chain.
Stalled production can mean companies downstream lack parts or inventory, which can have a global impact on the markets.
Surging Prices
Investors should be prepared for price spikes or declines based on the goods. Some goods will jump in price as supply shrinks and demand holds steady. For instance, garlic prices surged as Chinese suppliers weren’t able to export enough.
Goods tied to a broad set of economic activity, such as oil, remain under pressure as demand has declined.
Next Steps
No one knows what will happen next. What we do know is that the market is likely correcting itself as the virus spreads outside of China.
Regardless, market downturns don’t last forever, and the market has a way of finding its own level. There are several ways to react to this, but one is always wrong: panicking.
Keep your investment goals in mind and talk to your advisor before you make any big changes. They can help you assess your portfolio and guide you through these uncertain times. If you don’t have an advisor, remember that you don’t have to face market volatility alone – it takes accountability and discipline to follow your financial plan.