Investments

Coronavirus and the Markets

28th February / 2020
Coronavirus and the Markets

Over the past week, we’ve all seen the growing number of headlines about the impact the coronavirus is having on countless families around the world. In direct connection, we’ve also been reminded that the stock market can be an unpredictable and volatile place. As we launched into a new decade two months ago, one might have thought the trigger of the stock market’s first downturn would have been something a little more predictable, like a trade war, or an action by the Federal Reserve, or a geopolitical crisis. A global health scare was certainly not one anybody was expecting.

It is natural to be concerned about the implications of the coronavirus on our world’s physical and economic health. But if you are considering taking dramatic action in your portfolio in response to the recent market decline, we suggest reviewing some facts that we believe should give you comfort and confidence to “stay the course”:

Keep it in perspective. As of February 27, the global stock market’s recent decline has brought it back to the levels of…last October (source: Yahoo Finance). That’s correct, despite the media frenzy of the past week, all the stock market has “given back” is what it had gained over the previous six months. It is an unfortunate truth that the global stock market’s general tendency is to rise without much fanfare over time but be periodically punctuated by swift declines like the one we have experienced in the past month.

 

Stock market gyrations are not unusual. The graphic below shows the peak-trough decline in the S&P 500 index each year since 1989 and the corresponding fear(s) that permeated the minds of many investors in each year. As you can see, declines of 5-10% or more occur in the stock market almost every year, and there is always something to be scared of. 2020’s decline is clearly no different. With hindsight it’s tempting to believe that compounding wealth in the stock market is something that is easy to do, but history tells us it requires tolerating (or better yet, ignoring) the market’s normal year-to-year gyrations.

Long-term investors are not playing the same “game” as short-term traders. If your livelihood and/or your current lifestyle is impacted by what happens next month in the stock market, you should always be worried. Downturns, as we have all experienced recently, can be unpredictable and sudden. But if you have enough cash, bonds or other sources of funds to maintain your lifestyle for the next year or two, you are not being forced to sell your stock holdings today. You are playing a different game than the short-term traders who anxiously watch every tick of the stock market. You are playing a multi-year, multi-decade, maybe even multi-generational game with your stock investments, and with that mindset you should take comfort from the fact that stock markets generally go up, and historically the odds of a positive return increase as your holding period increases. Remember your game and don’t get caught up in the ones others around you might be playing.

Source: Dimensional 3.0 software. The above graph is represented by a blended index inclusive of the following indices: 1926-1969 CRSP US 1-10 Market Index; 1970-1987 MSCI World Index; 1988-present MSCI All-Country World Index. Past performance is not indicative of future results.

Source: Dimensional 3.0 software. The above graph is represented by a blended index inclusive of the following indices: 1926-1969 CRSP US 1-10 Market Index; 1970-1987 MSCI World Index; 1988-present MSCI All-Country World Index. Past performance is not indicative of future results.

 

Global health scares and the markets have a long history. While each outbreak is unique and there is always a chance the next health scare could have a greater impact on markets, history tells us the global economy and markets have remained relatively impartial to the effects of past viral epidemics. As you can see from the graphic below, a short-term dip in performance was typically followed by a continuation of the long-term upward trend. This once again reinforces the importance of staying the course during these uneasy times.

Note: MSCI World Index scale is reflected in the left vertical axis. 

Source: Charles Schwab, Factset data as of 1/21/2020. 

 

While it is natural to be worried when the media shouts at us from every direction, we think you should remain confident that bumpy periods like the one we are currently in are an unfortunate, but necessary prerequisite to potentially earn the long-term returns that the stock market has historically provided.

Our thoughts continue to be with the families dealing with this terrible virus.

Important Disclosure:

Advisory services provided by TFO Phoenix, Inc. We believe this information provided is reliable, but do not warrant its accuracy or completeness. It is provided for informational purposes only, and should not be construed as legal or tax advice. Laws may change pursuant to the new administration’s legislative agenda. Always consult an attorney or tax professional regarding your specific legal or tax situation.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Past performance is no guarantee of future results.