Investor anxiety during a financial downturn is hardly headline news. But the level of uncertainty over the global outbreak of the COVID-19 virus (also known as the coronavirus) has been particularly anxiety-inducing. Why? It is a perfect storm of three critical factors:
Historic Market Lows
As public health scientists rush to learn more about the new coronavirus strain, market indicators such as the Dow Jones Industrial Average and S&P 500 have already slumped in one week from historic highs to the lowest level since the Great Recession of 2008. Both indicators spiraled into the “market correction” range, meaning at least a 10% drop in stock prices from the recent market high. Pundits cannot rule out a bear market, meaning a 20% drop below the 52-week high. It is anyone’s guess about how low market indicators will drop.
No Quick Answers from the Lab
COVID-19 is still under study, with a vaccine at least a year away, according to the National Institute of Allergy and Infectious Diseases Director Anthony Fauci’s testimony at a recent Senate hearing. Researchers are also uncertain about COVID-19’s fatality rate, already estimated to be significantly higher than the annual flu. Medical science has no definitive answers about precisely how the virus is transmitted and what treatments work to suppress illness.
Economic Strain for an Interconnected World
Times have changed since the last virus outbreak—the SARS (severe acute respiratory syndrome) epidemic in 2002-2003. China, as the world’s No. 2 economy, now makes up close to 20% of the global gross domestic product. Global supply chains are now tighter and more dependent on China, with computers, electronic equipment, and industrial machinery the most vulnerable to supply chain disruptions, according to early research by Capital Group’s Jared Franz. The travel industry has also begun to brace for a negative impact.
Even as new COVID-19 cases slow in China, the virus has spread to every continent except Antarctica. Supply chain disruptions may soon begin to ease in China just as they begin in other countries. While China’s response to COVID-19 was dictated by an authoritarian one-party system, actions elsewhere will vary according to levels of preparedness, resources, and willingness of businesses and households to comply with containment measures.
A Historic Precedent for Investor Calm
In the heat of a crisis that drives down the market, investors may feel they face an emergency that requires quick action. In reality, downturns are frequent. The market has dropped by 20% every three and a half years or so since 1900.
FJY’s advice for riding out a volatile market remains the same: Act in your best long-term interest rather than react to market cycles. Timing the market is a notoriously ineffective way to approach investment decisions, even for seasoned pros. There is no reliable way to predict peaks and bottoms.
View the current market volatility in context:
- Markets are designed to handle uncertainty by processing information in real-time as it is available. As distressing as a downturn can be, it shows the market is functioning as expected.
- At times of increased uncertainty, investors demand commensurate returns for bearing the risk. Such has been the case when the market bounced back after virus outbreaks earlier this century (see graph below).
- Take the opportunity to review your portfolio and act according to your individual financial outlook and goals. You may have the assets to “buy low” and add stocks that were previously out of your range. Even if your financial advisor’s advice is to stay the course right now, you can still work together on assessing whether your portfolio reflects your risk tolerance and timeline.
Click on the links below more reading on the effects of COVID-19 and how to cope:
“We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns.”
A view of COVID-19’s effect on economic and financial markets from global research firm Dimensional (https://go.aws/2VMrxJF).
“I think we have time to observe how widespread this situation becomes before making any big decisions…”
Capital Group’s take on how markets, economies, and industries may cope with the COVID-19 outbreak (https://bit.ly/39mDr0U).
“For most of the American public, who are unlikely to be exposed to this virus at this time, the immediate health risk from COVID-19 is considered low.”
The latest COVID-19 updates and guidance from the federal Centers for Disease Control and Prevention (https://bit.ly/2PLfk4r).
The professionals at FJY stand ready to guide your portfolio and other financial planning through the virus outbreak and beyond to weather financial uncertainties and reach your long-term goals.