Although the coronavirus outbreak first surfaced in late January, it has taken until yesterday to spark an outsized reaction in the financial markets. As of just last week, stock markets were at record highs, and had risen uninterrupted nearly 20% since their October 2019 lows. So stocks were due for some sort of correction/pullback, and the coronavirus made a good catalyst.
We are not epidemiologists, but our job is to gauge how these outbreaks affect the financial markets and our clients’ portfolios. We don’t want to minimize the toll on human lives, but we have lived through several of these virus scares in the last couple decades, including SARS, H1N1 (swine flu), Ebola, etc. Each one made for scary headlines and dire projections, but ultimately passed. In hindsight, they all proved better buying opportunities vs. selling opportunities for investors.
To wit, the S&P 500 fell -12.8% during the SARS virus in 2003; it fell by -12.9% during the Zika virus in early 2016. These are just the two most recent examples, but in all cases the market recovered and went on to hit new highs. In the current environment, the market has already declined roughly -8% from recent highs. So if past is prologue, its getting a little late innings in terms of getting ahead of the decline by selling stocks.
There will certainly be disruptions in the global economy. Supply chains out of China are not running at full speed, and inventories in the US may be drawn down quickly. But they will likely be made up for in the back half of 2020, which will provide a boost to economic growth in the back half of the year.
For most of our client portfolios, we already had been fairly conservative in our asset allocations and exposure to stocks. We also have been holding a cash cushion that we were waiting for a pullback in the market to reinvest. At this juncture, we feel the most prudent approach is to be patient, and not upset one’s long-term investment plan. We will certainly continue to manage risk among our investments, with an eye towards allowing the dust to settle and looking to take advantage of any opportunities that surface.
Lastly, please don’t be fooled by salacious headlines that read “Dow falls 1000 points; 3rd biggest drop ever”. The Dow trades at a much higher price than it ever has. Thus, on a percentage basis, yesterday’s -3.5% decline doesn’t even register in the top 250 declines over the last 100 years.
Please feel free to contact us with any specific questions or concerns.
Jordan L. Kahn, CFA
Chief Investment Officer
Sources: Wall Street Journal; First Trust Advisors; MarketWatch.com
*This article is provided for informational purposes only and should not be interpreted as investment advice.
