Market Declines and the Coronavirus
Recent headlines about the coronavirus have seen global stock markets decline for what is now the sixth straight day. And the question on everybody’s mind is: how much worse will this get?
In times like these, it’s critical for investors to maintain perspective and distinguish between how we react to world events in our everyday lives and how we respond in our financial lives.
Intra-Year Declines
Today we are in the middle of 2020’s first major market decline (aka pullback). At the time of writing, the S&P 500 is down -10.6% from it’s peak on February 19th.
Before looking at WHY, let’s acknowledge that a 2020 pullback was virtually inevitable, considering 2019’s strong market performance and limited volatility. We saw very little in the way of intra-year declines last year, the worst was -6.8% over 23 business days following May 3rd’s peak.
Markets have a long track record of event-driven volatility that test investors’ resolve. But, as always, data can help put current events in perspective (click chart to enlarge):
Two key points to takeaway from this chart:
- The average intra-year decline is -13.8%
- 30 out of the last 40 years finished positive
Coronavirus
Let’s assess the current outbreak. While we would never downplay the human suffering element of this story, we believe it is key for investors to maintain appropriate perspective.
To that extent, we feel there are two worthy statistics which aren’t receiving much attention:
- The fatality rate is much smaller than comparable outbreaks.
- Total active cases have been declining for 10 days.
Fatality Rate:
According to the World Economic Forum, the fatality rate of the coronavirus is about 2%, which compares to 10% for SARS (2003) and approximately 35% for MERS (2012-2013).
Active Cases:
News outlets continue to update the number of people who have been infected (82,588 as of this writing), which is a cumulative statistic that will never go lower.
We believe it is more relevant to track the total number of active cases – which subtracts the number of resolved cases (both deaths and recoveries) – to give us better context on the number of people currently battling the virus.
According to Worldometer, which aggregates statistics from health agencies across the world, active cases peaked February 17th at 58,747, and have dropped 21% in the 11 days since. (Click chart for updated data)
It is also notable that, while the coronavirus has infected what seems like a large number of people across the world, in the U.S. alone during the 2019-2020 flu season there were at least 15 million flu illnesses, 140,000 hospitalizations and 8,200 deaths, according to the World Health Organization.
Fear & Discipline
In our everyday lives, it makes sense to heed expert advice on travel restrictions and take basic, sensible precautions. The same is true in our financial lives.
It can be difficult to distinguish between appropriate investment advice and knee-jerk reactions driven by market fear and panic. It’s understandable that in these situations, some investors may be tempted to sell long-term investments and seek safety.
When it comes to our investment portfolios, it often takes real discipline to avoid short-term panic. Investors today are bombarded by influential sources such as the financial media, pundits focused on short-term trading, and even friends and colleagues who may feel that the sky is falling.
Trying to time the market by selling stocks and “waiting until the dust settles” is a very difficult endeavor – one that usually results in missing the best-return days, which tend to cluster around the worst-return days.
Notably, from 1999 to 2018, six of the best 10 days occurred within two weeks of the 10 worst days. 2015 is a good example of this, with the year’s best day occuring only two days after it’s worst (August 24th and August 26th).
While it is unclear when the coronavirus will be fully contained, we would note the following positives:
- Technology, medicine, and communications allow much faster and better coordinated mobilization efforts against outbreaks than ever before.
- Health scares rarely cause anything more than temporary market dislocations.
- Full-on recessions are usually caused by excessive Fed tightening or extreme valuations.
- The US consumer (the economic engine of the US) remains in good shape, which portends well for the US economy.
Achieving financial goals is a long-term proposition. For that reason, we advise investors to filter out the short-term noise and focus on the long run, while taking advantage of opportunities to rebalance and harvest losses where appropriate for tax purposes.
While it’s impossible to know for sure, we are inclined to believe that like those infections in the past, this too shall pass.
