The world is watching the spread of the COVID-19 (Coronavirus) with great concern. The feeling of uncertainty has spread across the globe and is unsettling on a human level as well as from the perspective of how markets respond. U.S. stocks declined 13% in a week taking us back to last October prices. Even following this sharp correction, prices are still about 10% higher than a year ago.
So why are global stock markets concerned about the virus? It is not just about the unknown of how it spreads and how long it will last. It’s the economic uncertainty, caused from near-term supply disruptions in China and peoples’ reaction to the fear of infection. Even though business in China is slowly getting back to normal as the number of new cases diminishes, companies and governments around the world are taking aggressive measures and extra precautions by temporarily closing schools, canceling conferences, as well as business and personal travel. Will it impact the U.S. economy? We think it will to a small degree and, therefore, the markets are functioning properly as investors respond to new information as it becomes known.
Viruses like COVID-19 seem to occur every few years. There was SARS in 2003, Avian Flu in 2006, Swine Flu in 2009, MERS in 2013 and Zika virus in 2016. While the Coronavirus appears to be spreading faster than many, let’s keep things in perspective. Since October, the CDC estimates that 30 million US citizens have already contracted influenza and that, unfortunately, 15,000 to 20,000 people will die from the illness this season. As a comparison, there have been 2,700 deaths from the Coronavirus and none so far in the U.S. The swine flu spread very rapidly and led to 16,000 deaths in the U.S. and more than 500,000 globally.
Stock market corrections like this happen every 12 to 18 months and can last for a few months. We experienced two sharp corrections in May and August of last year (yep… you have already forgotten) but it has been more than a year since we experienced a more meaningful decline of 15%. We are not surprised to see this correction, and in some ways, we welcome the decline as it gives clients an opportunity to put fresh money to work at lower prices. Additionally, we felt the markets were getting a little overheated towards the end of 2019 and needed something to make investors a little less complacent.
The bad news is that corrections tend to be sharp, fast and scary. The good news is they tend to snap back within four to six months. The current market sell-off has all the characteristics of a correction. We all know stocks experience downdrafts and even have down years. It is not easy to invest through turbulent periods, but that is what we, as your advisor, are here to do.
When everyone else is acting like the sky is falling, it is important to remember a few things. First, think like an owner and not a trader. We are long-term investors and must focus on the long-term time horizon. We don’t trade stocks, we invest in great companies that create wealth over time. Second, there is a financial plan behind your investment portfolio and that plan allows for sharp downdrafts, corrections and bear markets. We don’t have a crystal ball to say when prices will bottom, but we do know this too shall pass and markets will recover.