What does the global COVID-19 pandemic mean for stock investments?
As fear of the Coronavirus sweeps the globe, a fierce financial panic has set in.
Stocks have not dropped this far, this fast, since the Great Recession panic of 2008. Now, like then, markets have fallen in lockstep, meaning losses are similar regardless of which country’s stocks we are looking at.
Drops are pretty even across the boards.
And are they steep!
From the S&P 500 to the Dow Jones Industrial Average to NASDAQ to world stock indexes, wealth is being erased dramatically as stocks plunge. Sellers way outnumber buyers.
It is a scary time, and not just financially. We are a long way from figuring out this disease. It is spreading with increasing traction around the world, with cases cropping up in very unexpected places. Take good care of yourself, avoid travel, distance yourself from others in meetings, and consider N95 masks. The death or mortality rate so far looks pretty low, but most of the data is out of China and I for one don’t really trust it. Hope for the best – that this new flu fades by summer – but plan for the worst. The worst may mean stocking up on masks and food, developing work/school at home contingency plans, and just avoiding avoidable human contact. If you must meet, keep your distance.
Beyond the paramount heath considerations, let’s try to get a bead on the potential risk the virus poses to your wealth.
First, take a deep breath. It is hard to get context with the media talking heads yammering on about the gloom and doom. So take a breath and try to get some perspective and balance.
The first thing to remember is that bad news and panics like this are commonplace throughout history. While tragic, none have yet derailed growing human prosperity or even put much of a dent in the long-term upward trend of the stock market.
Have a look at the graph below, charting world stocks with pandemic-type events overlaid as black dots on the graph. As you can see, none had any clear impact. In fact only 2 of 14 are correlated with a sharp downturn, and stocks did really well after 9 of them!
Why did the Coronavirus impact the US stock market? Is the virus collapsing the stock market?
What does this tell us? Nothing, really, except there is no clear relationship, and that stocks’ performance generally is driven by factors other than world health considerations.
The recent downdraft has been fierce. We have gone from records to correction in less than a week. We may even visit bear territory before it is all over. And while the recent “crash” is clearly associated with the virus, I don’t believe there is really any relationship to it.
This market has been overdue for a correction for months and months. Since the bottom in December 26 of 2018, it seems to have gone almost straight up. Greed was in control of the collective market psyche. Events like Iran’s attack on Saudi Arabia, the near-miss of an Iran/US war, and even the early warnings of the Coronavirus could not dent the greed-driven march upward.
This correction was long overdue, and the Coronavirus is just the excuse, or explanation, that is easy to paste on it. If not for the virus, something else would be blamed. But it was time.
Certainly, there will be economic impact. People will spend less on travel. Supply chains are choked. People will become more cautious and careful spending money. All these things will reduce companies’ profits and have some impact on stock prices. Travel related companies like airlines and cruise lines will probably bear much of the brunt. Some winners, like *Gilead Sciences and other pharmas, will likely shine as new treatments are developed.
But will the world come to an end? Will commerce cease?
Not on your life.
I view the current crisis as a profound buying opportunity. I am not cutting back my stocks exposure because of it, and I am shoveling what cash I can into the market at these bargain prices.
I know it may be hard for you to share my perspective. The human brain is just not wired to appreciate long term data streams without extraordinary effort. So take another look at the graph. Look at the peak right after the Dengue Fever dot. That marked the peak right before the Great Recession, the beginning of the worst bear market since the Great Depression. We are not likely to see that bad a market ever again in our lifetimes.
If you had dumped all of your money into stocks at the point in 2007 – the worst possible time! – and had the discipline to just stay invested, you would still be at near double your money now, only a decade or so later.
Try to keep that in mind, stifle that annoying “better sell before it goes to zero!” voice in your head and stay the course.
In the end, I am absolutely convinced you’ll be glad you did. That’s what I’m doing with my family’s money, and that’s what I think you should consider doing with yours!