Fear Over Logic

Post Written by: Angela R. Berkosky, CFA

This week in the market, the last week in February 2020, has been one for the record books. It’s hard to ignore as the news media is flashing big red text all over our TV screens, highlighting each new tidbit of information on the coronavirus and the financial markets on a minute-by-minute basis. Concerns over the spread of the virus and potential implications for global economies have the markets in what feels like a tailspin.

In the last week, the S&P 500 and Dow Jones Industrial indices have each fallen more than 11 percent.  International markets are also falling, with the broad international index down over 6 percent this week. Meanwhile, the U.S. 10-year Treasury yield is now at 1.17 percent, an all-time low, as investors have entered the “flight to safety” mode. No doubt the magnitude of these negative movements is unnerving, but it’s the swiftness with which it has occurred that’s even more difficult to absorb.

There is no doubt any virus outbreak that takes human lives is a tragedy, but rather than get caught up in the “panic” some would say is spreading across the markets, let’s take a step back and look at some facts.

  • The coronavirus was first reported in Wuhan, China on December 31, 2019, and is of the same family of viruses as the SARS outbreak (2002-2003) and MERS (2012).1
  • According to the World Health Organization, as of February 27, 2020, there are more than 82,000 cases of the coronavirus worldwide, 1,185 of them are newly reported. This is down from early February when new cases were 2,604 (February 2, 2020). 1
  • The bulk of the cases are in China (approximately 96 percent).1
  • Data currently available suggests the death rate of the virus is fairly low at 3 percent, with approximately 2,800 deaths worldwide. Again, 98 percent of these deaths are in China. This compares to a death rate of 35 percent for the MERS outbreak and 10 percent for the SARS outbreak. 1

The fear gripping the markets centers around a few main factors. Could this virus spread outside China and throughout the world reaching pandemic status? And could this affect the supply of key goods and services, particularly those coming from China, which would then have a negative impact on corporate earnings and global economic growth?

Research suggests that over the shorter term, we will most likely see some negative effects on earnings and global growth as a result of China being so largely impacted by the virus. Potentially lower earnings in the first half of the year are expected to be offset by a snapback in quarters later in the year and moving forward. In other words, the coronavirus and its impact will most likely delay the global recovery, not necessarily derail it.

Staying Disciplined

Regarding your investment portfolio, the natural tendency in times like these is to give in to the feeling of “panic” that the news media is portraying and exit the market. However, emotional selling during downturns can hinder long-term performance. Trying to time the market can prevent you from capturing the rewards of long-term investing and meeting your goals.

The chart below shows that there have been 16 market corrections of 10 percent or more over the last 93 years. The market declines (shown in red) are generally shorter than the periods of up markets (shown in blue). Also, after each decline, the market recovered and continued upward over the longer term. One could argue during periods like we are experiencing right now, an opportunity may exist to put idle cash to work if it makes sense in your overall portfolio allocation.

Investing market ups and downs

The main message is this is not a time to let your emotions rule the day. Periods of market volatility are to be expected given a long-term view. It is important to focus on the big picture, including your overall financial plan and long-term goals. At the end of the day, we cannot control what happens with the spread of the coronavirus and how it may affect our global economy. What we can control is your unique financial plan and the path to achieving your financial goals.

This is the time when having an advisor like Domani Wealth, who is focused on your financial goals, can really make a difference in your long-term financial plan. We continue to encourage investors to adhere to a disciplined process that includes a well-diversified asset allocation aligned with your financial goals. As always, please reach out to us if you have any questions about the market environment or your financial situation.

 

Sources:

  • Returns on a total return basis from 2/21/2020 – 2/28/2020.  International market index is MSCI ACWI ex US Net Total Return USD Index
  • Source for index data:  Bloomberg
  • Graph source:  DFA
  • Other sources:  1World Health Organization, Capital Economics, First Trust

 Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.

PLEASE SEE ADDITIONAL IMPORTANT DISCLOSURE INFORMATION

Market performance commentarywealth manager

Send this to a friend