Anytime that global stock markets drop by 5%+ within a few days, we know that this can create some anxiety. Similar to experiencing turbulence in an airplane, rationally we all know that a plane soaring high above the earth is never going to actually fall out of the sky, but the sudden jolts can still make us feel sick and nervous. It is always welcome to hear the captain come over the speaker and say something comforting like, “We’re currently flying through a few thunderstorms, but we should be clear of this in a few minutes.” So here we are.
Up until this week, global stock markets had largely ignored concerns regarding the COVID-2019 coronavirus outbreak. While it was clear that China’s massive quarantine efforts would impact their local economic output, the rest of the world was holding its breath and hoping that this storm might just pass them by. Having seen localized viral outbreaks in the past like SARS and MERS, I think that many investors decided something along the lines of, “We’ve seen this before, let’s just ignore it for now.”
So what changed this week to cause global stock markets to pull back by more than 5% within two days? Over the weekend it became clear that the virus is spreading more significantly outside of China and that it may be difficult to stop from spreading around the globe. Even if it can still be slowed or even contained, the efforts to do this, such as massive quarantines like China’s, will have economic ramifications. Exactly how far either the virus or the economic damage will spread is still very much unknown, but the markets are now definitely worried about this uncertainty.
This situation illustrates how quickly perspectives can change. At the beginning of 2020, we had seen a continuation of the positive optimism and momentum that provided double-digit stock market returns in 2019. But now we see that optimism erased and new talks of the dreaded “R” word. The simple reality though is that economic cycles of expansion and recession are normal. There is no doubt that our economy and other global economies will eventually see another recession – the only uncertainty is exactly what will cause it. If economic damage from COVID-2019 becomes widespread, then this is exactly the sort of catalyst that could take a nation from being at a point of slow economic growth to having negative economic growth. (A recession is defined as having two quarters of negative economic growth)
This concern is greatest for European economies who have greatly struggled with very mediocre economic growth for over a decade now. (We are underweight Europe in our investment portfolios) It is less of a concern for a stronger economy like China or the US. No one is yet predicting that the coronavirus impact will be enough to take either the US or China into negative growth territory. However, it is important to note that these sorts of forecasts are changing by the day. The simple truth is that no one, absolutely no one, really knows what is going to happen. While this statement may leave a dull feeling in the pit of your stomach, keep in mind that this is always the truth, whether the pundits are being optimistic or pessimistic. All anyone can ever do is make their best guess about the future. But that doesn’t mean there are not things we can know with certainty. The one thing that we do know is that given enough time, markets have always recovered from economic shocks, whether they came from events like wars, natural disasters, or pandemics.
While individual companies can certainly falter and fail in a recession, a well-diversified portfolio has always recovered given enough time. How much time will be needed? We don’t know. However, keep in mind that the stock market impact is the greatest while things are the most uncertain (which is now). Once the outcome is clearer, the markets will start looking toward something else to be optimistic or worried about.
In terms of pandemics, the good news is that global markets have usually tended toward quick 10% – 15% drops, but have recovered value within just a few months. Of course, any specific pandemic can be unique. COVID-2019 seems to be spreading much more widely than either SARS or MERS, but the death rate is much, much lower. It is really tough to compare. In fact, the best comparison may be to the Spanish Flu of 1918, but economic and stock market data for that time period is far more limited, so it is impossible to make any meaningful data-based comparisons. However, we can unequivocally still say that markets recovered from that pandemic in spite of how widespread it was and how much death and the economic damage it left in its wake.
Our advice, as always, is to remain focused on your longer-term goals. That said, a time like this is a good reminder for just how quickly stock markets can drop when sentiment changes. Many investors have been somewhat lulled into complacency after experiencing an 11-year bull market. Turbulence like this is a good reminder that markets do drop, and this may present a good time for you to revisit the risk level of your portfolio. Are you still taking the risks that you need to achieve your long-term goals? Or, is there any opportunity to pull back to a lower risk investment model given the progress you have made over the last decade? If you are feeling anxious, please reach out to us, and we can help you take a fresh look at answering these important questions.
Also, we will actively be looking for any opportunities that present themselves in your portfolio. When markets become spooked, there is almost always a tendency for people to do some irrational things, which can lead to valuable rebalancing opportunities for those who are steadfastly focused on the long-term. Additionally, we are actively in conversation with the managers of the strategies that we utilize in your portfolio, especially the foreign investment managers. We are gaining insights from them as well as hearing their thoughts for how they are monitoring the portfolio and making strategic adjustments to respond to the current situation.
As always, please reach out to us if you have any specific questions or concerns. We will answer the ones that we are able to, and we will walk with you through the uncertain ones that we are not able to answer.
Paracle Personal Financial Management is an independent financial planning firm founded in 2004 with an honest desire to help people optimize their finances by providing unbiased financial planning and investment advice that puts their clients first. Paracle specializes in delivering expert, comprehensive wealth management services to busy families. Their expertise integrates financial planning with investment management to ensure their clients experience confidence in every aspect of their plan so they can focus on what matters most. To learn more about Paracle, connect with them on LinkedIn.