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The markets have reacted strongly to the Coronavirus this past week, adding to weekly losses that have not been seen since 2008. There is a chance that the next outbreak could have larger implications for the global economy, however the market has shown remarkable resilience in the face of prior epidemics as seen in the
chart below.

Events such as Coronavirus naturally lead to several important questions regarding the markets, your investments, and most importantly, your financial plan. What should I do given a large stock market sell-off? How will this short-term negative performance affect my long-term financial plan and goals? Is this downturn in the market somehow different than in years prior? Let us start off first by addressing what Coronavirus is and its impact.

Coronavirus and Its Origin

Coronavirus, also known as COVID-19, is caused by the virus SARS-CoV-2, which is most common in bats. It is believed that the virus initially jumped from bats to some domestic animal before finally jumping species once more to humans. Originally documented in Wuhan, China, it has now spread to several other countries globally. The lack of containment to China acted as a catalyst for the recent global stock market sell-off. It is likely that cases of Coronavirus will spike sharply in the coming weeks before hopefully tapering off.

Coronavirus and Its Impact

Stocks have dropped significantly (~11%) over the last week, and we should examine whether that is based on “panic” behavior or based on logical analysis.  Our framework is to distinguish between economic activities that are lost for good – water under the bridge – and activities that should spring back once we get through with this epidemic.  As an example of the former, suppose that you skip going to your favorite restaurant this month; that does not imply that you will go twice next month to make up for it.  As many other people will react the same way, the restaurant might lose 1/12th (one month) of its total revenue (~8%) this year. The value of the restaurant business should go down because of this, but not so much because it should get back to normal in the following months and years.  An example of the latter “spring back” would be durable goods; if you had planned to purchase a Tesla (or a refrigerator) this month, and postponed it due to Coronavirus-associated production delays, you can still buy it later in the year. The value of that business, and the stock, should be much less impacted than the restaurant. It makes sense that restaurants, travel, energy, entertainment, tourism, hospitality, and client-facing retailers would be most affected. Indeed, stock prices in these sectors have declined the most, reflecting the “water under the bridge” concept. Other “spring-back” sectors will be affected to a lesser extent. Overall, we believe that media responses to the Coronavirus may have exaggerated the panic. The stock market reaction that we have experienced this week represents a blend of both rational thinking and uncertainty and will evolve as new information is reported.

What Should I Do Given a Large Stock Market Sell-Off?

In short: nothing. In events such as this it is best to avoid all out pandemonium, which can be difficult to do, especially when news sources are bombarding you with information. As the graph above so succinctly highlights: the markets are likely to recover in the near- to long-term. Being out of the market and panic selling is by far the worst thing investors can do for their portfolios and their financial plans. One thing remains true over history: the market has an incredible way of rebounding after low and even extremely low periods. This is something you as an investor do not want to miss out on when the dust settles.

How Will This Short-Term Negative Performance Affect My Long-Term Financial Plan and Goals?

One thing we as financial planners look at is the long-term viability of your financial plan. Short-term noise is usually best avoided because it can push investors to make short-term decisions that can negatively impact their portfolio and therefore their financial plan. Trying to market time has always been a losing strategy. We are uncertain of what may happen to markets and the global economy in the short-term. However, we are positive that in the long-term your financial plan should not suffer because of these short-term market impacts.

Is this downturn in the market somehow different than in years prior?

This downturn is different in terms of what caused it. It may also differ because of its impact on an increasingly globalized and connected economy. Finally, it is different than prior epidemics due to the sheer increase in the amount of information made available via social media and online news sources. How it is very much the same as prior downturns is that over the long-term we anticipate markets to recover.

Lean on Your Private Ocean Team, Talk to Your Advisor

In times of uncertainty like these we are here to be your thought partner, and to help guide you. It is our hope that we can set you at ease and continue to focus on your long-term goals and financial planning and investment needs. Please call or email your team here at Private Ocean should you have questions.