According to the CDC,1 the recent coronavirus (COVID-19) outbreak has claimed 10 lives and impacted nearly 100 people in the U.S. as of March 6th, 2020 and it has also injected a sense of uncertainty into the markets. If you’re invested in the stock market you may have found yourself sitting on the edge of your seat over the last few weeks as we watch market volatility increase.
A Brief History Lesson
The market’s negative response to health crises is nothing new. The below table shows that since 2003, approximately six months after early reports of a major outbreak, the S&P 500 bounced back by an average of 10.47 percent. After 12 months, it rebounded by an average of 17.17 percent.
|Epidemic||Month-end*||S&P 500 6-month performance||S&P 500 12-month performance|
|Avian (bird) flu||Jun. 2006||11.66%||18.36%|
|Swine flu (H1N1)||Apr. 2009||18.72%||35.96%|
Source: Dow Jones Market Data, cited on MarketWatch.com February 24, 2020. *End of month during which early incidents of outbreak were reported
Why is it important to take a look back in time? While there are no guarantees the current situation with COVID-19 will follow a similar pattern to the above epidemics, it helps us to better understand and put into perspective that historically over long periods of time, despite an epidemic, stocks typically regain their upward trajectory.
Professionals in the financial industry, whether they are brokers, analysts or advisors, tend to throw the word “fundamentals” around when asked what drives the market. We would agree that fundamentals do drive the market…to an extent.
Unfortunately, sentiment is also a key driver of market movements. Fundamentals drive what a company should be valued at. The sentiment of traders is what pushes the price of that company or market above or below that value. What we are currently experiencing is both ends of the sentiment spectrum. Going into the end of 2019, sentiment was at an all-time high, and traders continued to “buy the trend” and push the price of the market higher. And push the price they did, to the extent that two stocks, Apple and Microsoft, made up 15% of the S&P 500’s return last year.
Just as quickly, traders followed the trend of negative sentiment down on the coronavirus headlines and continued to “sell the news” to an extent that we feel is overblown. What we need to remember though is that these corrections are normal. Over the past 50 years, the stock market experiences a correction every 18 months. On average, the market was down 13% during these corrections and recovered its losses within 4 months.
The coronavirus is proving to be more impactful to businesses than the market initially expected. There will be economic disruptions that come from this as the virus runs its course. It is important to maintain discipline and not take part in the group think of sentiment because while sentiment can swing, fundamentals remain. Negative sentiment pushes the price of the market below its fundamental value, and we continue to remain long-term holders of stocks.
We understand that these market disruptions can cause nervousness in investors. In times like these though, you need to trust the fundamentals of the market and be diversified in your asset allocation
What Should You Do?
How do you respond to the rise and fall of the stock market? Do you react in fear when the market starts to fall?
The reality of the market is that it’s a neutral circumstance. It is not the market, but the investor who affects this roller coaster pattern based on his or her thoughts and emotions toward it.
Our emotional perception of the market directly influences our actions. When the stock market declines and we become anxious, we tend to act on those feelings. If we react in fear, we can actually encourage a deteriorating market. But, if we can better navigate these seasons and fight against our emotive tendencies, we can also better control our emotions and stay on track with our financial goals.
Avoid making irrational, impulsive decisions based on the media headlines regarding the state of the stock market. Stick with your plan. The market will always ebb and flow. It’s up to how you choose to respond.