Over the past week, the global markets have seen a rapid drop in value due to fears about the spread and impact of Novel Coronavirus, 2019-nCoV. The coronavirus is a rapidly spreading, acute respiratory virus that originated in the markets of Wuhan, China. Since early January, it has quickly spread from China to the rest of the world.
The coronavirus threatens global supply chains, which could cause a ripple effect through delayed processing, unfilled orders, and decline in supply. China has taken extreme measures to prevent an outright pandemic, but fears of a global outbreak are still high, and the virus has spread to nearly every continent. Travel and Commodities have been hit especially hard.
Is this unprecedented?
No. Since 1970, there have been several epidemics that had the potential to negatively impact economies across the globe. In some cases, there was a drop in global markets, in others, the market shrugged it off and continued upwards. The chart below shows some of those epidemics and the returns 1-month, 3-months, and 6-months post epidemic.
The market is assessing the impact of the disruption to corporate profits. In the short-term, the impact will most likely be negative, hence the quick drop in market valuations. In the long run, the aggregate valuations of those corporations are much more dependent on broader market conditions, which are impossible to predict with a high degree of confidence. Looking at the chart above, the 3-month and 6-month “post epidemic” returns look a lot like 3 and 6-month returns without an epidemic. What that really means is that an epidemic like this doesn’t give us any actionable information about future returns.
The severity of the drop over such a short time frame might also cause concern but, again, this is nothing new. Since 2009, the S&P 500 has experienced drops of 5% or more 26 times, with a variety of concerning headlines to go along with it.
These drops have lasted anywhere from 7 days to 100 days, which makes “timing the bottom” a difficult proposition and one that is most likely going to only add more stress and uncertainty to your investment plan.
How does this impact me?
While you should take precautions about traveling to certain regions and make sure to take good care of yourself physically, the impact to your planning goals should be minimal, other than the short-term stress it might cause you. Well-diversified portfolios are designed with volatility in mind (otherwise why diversify?) and to withstand that volatility; that doesn’t mean your portfolio won’t go down in value but should hopefully avoid the more extreme drops attributable to concentrated positions. Your plan is designed for your needs, and you should have adequate reserves in place to cover short-term spending and to rebalance into volatile markets.
What should I do?
The temptation is going to be to fret over the drop and think about selling your investments and waiting for a recovery. You also might be thinking, “why didn’t we sell on XYZ date?” While that might make us feel better in the short-term, it’s usually a losing proposition. There’s no telling when the market will stop dropping, and often the largest single-day gains in markets come during times of large losses. Missing out on those large, single-day gains has a huge impact on your long-term returns. Your investment plans should not hinge on successfully timing drops or recoveries in the market, as that has been attempted innumerable times with dismal results.
Instead of looking to retreat from a market downturn, the best course of action is to be proactive in the context of your plan: If you have lots of cash sitting on the side, now is a good opportunity to evaluate how that fits into your long-term goals and whether it makes sense to invest some of it. Some additional things that can be reviewed in times of market turmoil are the opportunity for tax-loss harvesting, to rebalance your portfolio back to your target allocations, or take advantage of ROTH conversions. We will continue to review and monitor our client accounts for those opportunities and to ensure their plan remains on track.
As always, we are available to discuss your unique plan and situation and to answer any questions you may have. For additional perspective, check out this article from David Dick, CFP®: The Impact of the Coronavirus on the Market and Your Financial Portfolio.