Staying the Course – Coronavirus and Stock Market Volatility

The recent coronavirus (COVID-19) outbreak has certainly injected a sense of uncertainty into the financial markets. Large single-day drops can be unnerving, especially for people who started investing in the past decade and have never experienced this before.

A Look At History 

The market’s negative response to health crises is nothing new. The below table shows that since 2003, approximately six months after early reports of a major outbreak, the S&P 500 bounced back by an average of 10.47%. After 12 months, it rebounded by an average of 17.17%.

^{Source: Dow Jones Market Data, cited on MarketWatch.com February 24, 2020.} 

^{*End of month during which early incidents of outbreak were reported}

Of course there are no guarantees the coronavirus situation will follow a pattern similar to the above epidemics.  But it helps to put these historical occurrences in perspective and see that, over long periods of time, stocks typically recover strongly.   

Market Psychology

Larger swings in the stock market naturally can lead to larger swings in our emotions.    But understanding 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.  In situations like this, it is important to have perspective and remember that swift market drops are not unusual. News headlines are scary as is the fear of the unknown.  The long-lasting bull market that just came to an end no-doubt lulled many people into thinking that markets only go up.  But they also go down at times.  

Short-term market movements are heavily influenced by headlines and computerized trading.  Over the long term the stock market tends to reflect broader-based economic trends, and the U.S. economy has been solid. 

What Should You Do?

Don’t panic. 

Fear is a natural emotion to encounter during turbulent times.  This is especially true when a health epidemic hits that can impact both your health and your finances. When market corrections occur (a drop of 10% in one of the major U.S. stock indexes) the media only adds fuel to the fire.   The media reports on sensational things, even if they don’t reflect what typical ordinary people are experiencing.   Watching less TV is probably good for most of us during these times.  

The coronavirus 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 drop, but at the same time, remember that market volatility is normal and expected. The key is to keep an eye on the long-term big picture. 

Remember that your investments with us were planned in advance, and in anticipation of these occasional drops.  Our more conservative investors have dropped far less than the major stock market indexes because they don’t own many stock positions in the first place. 

If you have any questions about your specific situation, please contact us.