“The only thing you sometimes have control over is your perspective. You don’t have control over your situation. But you have a choice about how you view it.“
– Chris Pine, American actor
As February began, investors were keeping a cautious eye on the coronavirus spreading in China. While there were isolated outbreaks around the globe, they were just that—isolated. That changed dramatically when headlines announced the coronavirus had spread to northern Italy, South Korea, and Iran. Now, 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.
Market declines can occur when investors are unsure of their expectations for the future. The expansion of the coronavirus outbreak is causing worry among governments, companies, and individuals about the future impact on the global economy. Put another way, heightened uncertainty simply means that the number of economic outcomes has widened. In this case, they are all to the downside.
Today, there are growing worries that disruptions to normal routines could put downward pressure on the demand for goods and services, delaying a projected acceleration in corporate profits this year. Economists refer to this as a ‘demand shock.’ For example, Apple announced earlier this month that it expected revenue to take a hit from problems making and selling products in China, and airlines are preparing for the toll it will take on travel.
At the Nalls Sherbakoff Group, we believe 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, as they have done recently too. Such declines can be distressing to any investor, but the decline is also a demonstrating the market is functioning as we would expect.
Perspective: Coronavirus and past epidemics
But, are investors overreacting? Is the public overreacting? According to the CDC, the annual flu has infected between 32 and 45 million people in the U.S. this season, which began on October 1. There have been 310,000-560,000 hospitalizations, and, tragically, 18,000-46,000 deaths. Yet, our daily routine goes on uninterrupted.
In comparison, approximately 150 Americans have contracted the coronavirus and there have been 11 deaths as of March 4. Per the Wall Street Journal, “The new virus is particularly challenging for public-health officials because people who are infected and transmitting to others might have only mild flu-like symptoms, or no symptoms at all, making them difficult to identify.” On the other hand, compared to the annual flu, the coronavirus seems to be more contagious and deadlier, despite the fact that confirmed U.S. cases number a fraction of the annual flu.
While we don’t know if this will eventually turn into a significant health crisis, we’ve lived with epidemics before, including measles, polio, SARS, MERS, H1N1, and the flu, which strikes every year and can be deadly.
Fear spreads fast, but keep perspective
While we can critique the media and stock market reactions, what we know is the market has sold off and fear has spread far faster than the virus. As we enter March, the economy is on a solid footing, and the banking system is in much better shape than it was in 2008.
On February 28, Federal Chief Jerome Powell reaffirmed, “The fundamentals of the U.S. economy remain strong,” but added he is “closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” The last sentence is the Fed’s way of hinting a rate cut or other actions are being carefully considered. And, in fact, the Fed made a preemptive rate cut on March 2.
That said, we know volatility in markets is inevitable, but has typically been short-lived. Stocks seem to take the stairs up and the elevator down. This bout of volatility will end, but calling a bottom is virtually impossible. You know and we know that no one has a window on the future.
Once again, I will emphasize your holistic financial plan incorporates your goals and is crafted based on a number of factors, including your risk preferences and time horizon. It is a roadmap to your financial goals. It incorporates the inevitable market declines and keeps one from making rash decisions when markets turn volatile. Or, for that matter, when stocks surge ahead and one may be tempted to take a more aggressive but riskier posture.
We can’t tell you when things will turn or by how much, but our expectation is bearing today’s risk will be compensated with positive expected returns. 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.