The uncertainty surrounding the spread of the coronavirus is unsettling on a human level as well as from the perspective of how markets respond. Amid the anxiety, decades of financial science and long-term investing principles offer guidance.
In 2019, the S&P 500 was up 31.49% in its 10th year of a bull market, which was difficult to forecast at the beginning of last year. Looking at a 1-year chart, the recent volatility has caused the S&P 500 to retrace back down to its value on May 27th, 2019.
The current selloff could certainly continue, but to what extent and when volatility goes back to normal levels is anyone’s guess. During times like these, it may feel like you should be making major changes to your portfolio. But making big financial decisions based on emotions is never a wise strategy.
The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.
From our perspective, it is a fundamental principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.
Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. Apple announced earlier this month that it expected revenue to take a hit from problems making and selling products in China. Australia’s prime minister has said the virus will likely become a global pandemic, and other officials there warned of a serious blow to the country’s economy. Airlines are preparing for the toll it will take on travel. And these are just a few examples of how the impact of the coronavirus is being assessed.
The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.
We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.
We pride ourselves on helping investors develop a long-term plan they can stick within a variety of conditions. We are trained to consider a wide range of possible outcomes, both good and bad, when helping an investor establish an asset allocation and plan. Those preparations include the possibility, even the inevitability, of a downturn. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.