According to the CDC,1 as of March 12, 2020, the Coronavirus (COVID-19) outbreak has claimed almost 5,000 lives and impacted approximately 132,000 people worldwide. This has injected a sense of uncertainty into financial markets here in the U.S. If you are invested in the stock market, you may have found yourself sitting on the edge of your seat for the last few weeks as the market goes down one day and back up the next.
As a professional financial advisor, I would like to take a moment to update you on some facts related to the Coronavirus, its impact on the financial markets, and, ultimately, on your personal financial situation.
A Brief History Lesson
The market’s negative response to health crises is nothing new. The table below shows that since 2003, by approximately six months after early reports of a major 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 |
|---|---|---|---|
| SARS | Apr. 2003 | 14.59% | 20.76% |
| Avian (bird) flu | Jun. 2006 | 11.66% | 18.36% |
| Swine flu (H1N1) | Apr. 2009 | 18.72% | 35.96% |
| MERS | May 2013 | 10.74% | 17.96% |
| Ebola | Mar. 2014 | 5.34% | 10.44% |
| Measles/Rubeola | Dec. 2014 | 0.20% | -0.73% |
| Zika | Jan. 2016 | 12.03% | 17.45% |
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 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 better understand and put into perspective the current unsettling volatility of the stock market. The facts show that historically, despite an epidemic, stocks typically regain their upward trajectory.
Market Psychology
As we explored above, all assets rise and fall in value and the more extreme the swing, the stronger the accompanying emotion. Overcoming this market psychology is no easy feat. However, learning how the market works can help reduce stress and increase your ability to “stay the course."
I work with my clients to plan investment strategies designed to support their 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 scariest of all, but the nature of the market is that it will go up and down. That is just par for the course.
When you think about it, our emotions can be affected in a similar way: surges of pleasure when the market is up and depression or fear when it is down. 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 a fee-only financial planner, if you haven't done that before -- one who has experience, a long-range perspective and who will act in your best interest. Always keep in mind that in the short term, market movements can be heavily influenced by headlines and computerized trading, but in the long term, markets tend to reflect broader-based economic trends. One of our most important roles as a trusted advisor is to not let the difficulties of the short term prevent reaping the potential benefits of sound, long-term investing.
What Should You Do?
The answer is simple: Don’t panic.
Sure, fear is a natural emotion to encounter during turbulent times especially when a health epidemic hits, such as 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 completely out of our control, but our reaction to the financial markets is something we can control. It’s not fun seeing your portfolio total drop. The key is to “zoom-out” and look at the long-term big picture: market volatility is normal and expected and does not keep you from achieving your financial objectives.
What We’re Doing
We know for a fact that the market will continue to do three things: It will sometimes go up, it will sometimes go down, and sometimes it will barely budge. The other absolute certainty? The financial well-being of our clients is our number one objective.
We will leave you with one final piece of good news: sometimes, situations like this can actually create opportunities. For example, as prices drop, we are looking for opportunities to “rebalance” and shift the asset allocation of our clients to capture benefits in alignment with their long-term goals.
If you have any questions about your specific situation or would like to schedule a consultation, please contact us. We are here to help and we are here for you.
This content is developed by Twenty Over Ten from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult fee-only financial, legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.