According to the CDC, the recent coronavirus (COVID-19) outbreak has claimed almost 6,600 lives and impacted nearly 162,000 people worldwide as of March 16th, 2020. It's injected a sense of uncertainty into the markets. If you're invested in the stock market, you may have found yourself sitting on the edge of your seat over the last few weeks as market volatility significantly increased.
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 financial situation.
A Brief History Lesson
The market's stive response to health crises is nothing new. The below table shows that since 2003, approximately six months after early reports of a significant outbreak, the S&P 500 bounced back by an average of 10.47 percent. After 12 months, it rebounded by an average of 17.17 percent.
|Epidemic||Month-end*||S&P 500 6-month performance||S&P 500 12-month performance|
|Avian (bird) flu||Jun. 2006||11.66%||18.36%|
|Swine flu (H1N1)||Apr. 2009||18.72%||35.96%|
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 understand better and put into perspective that historically over long periods of time, despite an epidemic, stocks typically regain their footing and upward trajectory.
As we explored above, all assets rise and fall in value, and the more extreme the swing, the stronger the sentiment. 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."
Your investments are designed to support your long-term objectives, not today's needs. 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 most frightening of all, but the nature of the market is that they go up and they go down. That is just par for the course.
When you think about it, our emotions share a similar reaction between excitement and depression. Surges of pleasure with favorable uptrends and neurotic negatives with declines. Unfortunately, emotions can be drivers for selling early, thus diminishing significant gains that can occur over the long-term.
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 on top of the situation. And always keep in mind that in the short term, market movements can be heavily influenced by headlines and algorithmic trading, but in the long run, markets tend to reflect broader-based economic trends. One of our most important roles as your trusted advisor is not to 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.
Fear is a natural emotion to encounter during turbulent times, especially when a health epidemic hits like a virus that can impact both your health and your finances. When market corrections occur (classified as a drop of 10 percent or more in one of the major U.S. stock indexes), 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.
Acknowledge that the market is not just about winning and losing – it's about strategy and duration. The virus and how it spreads is entirely out of our control, but our reaction to 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.
What We're Doing
What we do know for a fact is that the market will continue to do three things: It will go up, it will go down, and sometimes it will go sideways.
And we will leave you with one final piece of good news: situations like this can create opportunities. For example, as prices drop, we will also seek out any opportunities to "rebalance" and shift your asset allocation if it aligns with your long-term goals. Or you can take the opportunity to buy into stock positions that are lower prices. Finally, you can take advantage of tax-loss harvesting, to benefit from recognizing losses to offset future capital gains.
If you have any questions about your specific situation, please contact us. Now, more than ever is an excellent time to reevaluate your financial plan and make any necessary changes, to reduce your risk while capitalizing on emerging opportunities.