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Coronavirus Rattles Markets

| February 24, 2020
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Coronavirus Fears and Your Investments

Today was an ugly day in the markets.  As the coronavirus persists and spreads, markets are finally waking up to the realization that this epidemic will have economic repercussions. 

As I had discussed several weeks ago, the coronavirus is something brand new to markets.  Since reports first started coming out, markets tried to shrug it off as a short term problem that would remain localized and then go away.  That was always a bit of wishful thinking.  Chinese manufacturing is at a virtual standstill.  The country relies heavily on a migrant workforce, who go “home” over the Lunar New Year to visit family, often in rural areas, then return to work often in a distant city after the holiday.  Many of those workers either can’t or don’t want to go back to work until the epidemic situation is resolved.  This is putting a major squeeze not only on Chinese companies, but on global and US based enterprises that rely on China for key parts and components, or rely on Chinese business activity (shippers, airlines, etc.). 

This situation is not likely to be resolving itself quickly – but it WILL be resolved.  While I am no medical expert, my reading suggests that experts believe that vaccine development does not face significant obstacles.  A vaccine was developed to prevent the SARS coronavirus in 2002 - although that outbreak went away on its own before the vaccine was put to wide use.  Unfortunately, these things take time.  And time is the enemy.  Until the situation stabilizes, we can expect markets will be unsettled, with sharp swings either up or down based on the days news and economic reports. 

From an investment point of view times like these can be scary.  News outlets of course love to magnify the dramatic, and tend to overhype that which scares us the most.  That said, I would not be surprised to see further drops after today’s shellacking.  The economic implications of this epidemic are not trivial.   But at the same time, we can have no idea how long the situation will persist, or how bad it will get.  A new cure or vaccine could be announced tomorrow (the worlds best scientific minds are working on it) – or the situation could get worse before it gets better. One can certainly sell all investments and “go to cash” to avoid the uncertainty – but how long will you hide?  There is never a signal that is going to tell you “all is clear” to get back in the pool.   Many investors who sell in a time of crisis wind up watching markets pass them by as they sit on the sidelines.   Predicting market movements, and predicting future events is futile.  That is why time after time after time we find that it is best to follow the tried and true approach to investing in a time of crisis:    

  • Before the Crisis Happens: Make sure your asset allocation is appropriate to your financial plan, goals, and ability to handle risk. 
  • During the Crisis:
    • Have confidence in your selected strategy – if your investments are appropriate, stay the course.  
    • Be patient…market cycles usually take months to play out – but sometimes take years. Investing is not a sit com where issues quickly resolve (although sometimes they do). 
    • Focus on dividends and income. Remember that even if the value of your portfolio is down due to market fears, your stocks are still paying dividends, and your bonds are paying interest.  Your investments are working for you, even if their nominal value on this particular day takes a hit. 
    • If your financial plan is sound, it will already have accounted for this kind of event - we KNOW these things are going to happen - its only the timing and the form it takes that is a surprise.  So there is no need to panic when it is all part of your financial plan! 
    • If the situation persists and markets drop substantially, consider rebalancing your portfolio to take advantage of lower stock prices. 

Unsure if you are on the right course?  Give us a call and we can talk through your concerns.  


Jim

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