Coronavirus has wreaked havoc on the markets. The Dow Jones has just experienced one of the quickest bear markets in history. Does that mean we’ll see one of the quickest recoveries? Does “quick” even matter in the long run?
If the sudden return of dramatic volatility concerns you, you’re not alone. “When the market moves sharply down, it’s understandable that people get nervous, especially with some companies anticipating that Coronavirus will cut into their expected earnings,” says Brandon Krieg, CEO of Stash in New York City.
With the possible exception of the fourth quarter in 2018, many of today’s younger investors (and a few older ones who have forgotten), can’t recall when the market exhibited such extreme fluctuations. It’s no surprise they are shocked to see this relative calm has been broken.
“Over the last couple of years, the markets have experienced an unusually low amount of volatility,” says Jose Cuevas, Vice President of Financial Planning at Wisdom Investments in Rolling Meadows, Illinois. “The Coronavirus event is creating a heightened experience of volatility. Events like the Coronavirus help investors put into perspective proper expectations of potential market volatility.”
As many pundits have either mentioned or contributed to, market extremes or Coronavirus anxiety have become a chicken and egg question. Which came first? An even better question: Will people panic and harm their long-term interests in the process?
“Headlines reporting all sorts of news, from health scares to politics, always have and always will add volatility to the markets,” says Greg Klingler, Director of Wealth Management for the Government Employees’ Benefit Association in Fort Meade, Maryland. “This will cause many people to fear the fate of their retirement accounts, which is a completely understandable reaction. But to maximize retirement savings, there are many reasons to remain in the market rather than attempt to intuit or guess when and where big shifts in fortune may arrive.”
Do-it-yourself investors are especially vulnerable, as they are more susceptible to emotional responses than veteran investment professionals. Yet undulating markets require individuals to embrace the steely cool of a seasoned pro.
“When the media uses words like ‘plummet’ or ‘tumble’ to describe market volatility—as it generally does during election years and international panics such as Coronavirus—it can feel nearly impossible to stay disciplined as an investor,” says Nolan Schexnayder, owner and senior advisor of Schexnayder Wealth Advisors in southeast Louisiana. “However, weathering short-term volatility is key to accomplishing long-term financial goals. Keep in mind, a long-term investment was purchased for its future value not its current value.”
That being said, the news will get worse before it gets better. Unlike other countries where COVID-19 struck first, the United States remains in the early phase. The good news, though, is that these viral epidemics don’t last forever.
“Over the short-term, the virus will continue to spread,” says Max Gokhman, Head of Asset Allocation at Pacific Life Fund Advisors in Newport Beach, California. “The rising death toll will continue creating headlines that rattle skittish investors, even as the case fatality rate keeps falling. At the same time, we’re expecting bankers and policymakers to coalesce around a coordinated response that will help keep the economy healthy, and that should lead to a rebound in growth during the second half of the year, proportionate to the decline we’ll see in the first two quarters.”
If you focus on the long-term, you can turn the short-term worry reflected in the markets to your advantage.
“Investing is a marathon and not a sprint,” says Robert R. Johnson, Professor of Finance, Heider College of Business at Creighton University in Omaha. “Ten years from now, from a market’s perspective, the Coronavirus outbreak is likely to be a footnote. When people ask me, when is the best time to invest, I routinely say today.”
Unlike sector-specific down markets, the current “CoronaCrash” has infected all publicly traded companies—the sweet darling babies as well as the dirty bathwater. Sifting through this will allow you to find the nuggets that promise rich rewards, perhaps even sooner than you think.
“The long-term implications of this current market craziness are in the opportunities that it is going to create,” says Taylor Kovar, CEO at Kovar Wealth Management in Lufkin, Texas. “With nearly all sectors experiencing a downturn, it is a great time to pick up some companies that are ‘on-sale’ and will rapidly rebound once this scare is over.”
The fact remains, the markets touched record highs just a little more than a month ago, so a “modest” pullback would be considered normal. Add a Black Swan event into the mix, and it’s perfectly easy to understand what’s occurring in the markets. It’s nothing new. The markets have weathered such storms in the past and have still turned out fine.
“The Coronavirus focused decline is a good reminder that it is usually the ‘unexpected’ type of event that leads to downside volatility,” says Michael Jones, Chief Investment Strategist, High Probability Advisors, Rochester, New York. “In this case, considering the market posted an enormous gain in 2019, it is not surprising that any event that portends a slowing of economic growth would cause concern. We should note that the equity markets post declines of 10%+ once per year on average, so declines are a normal part of the investment picture.”
Three factors can drive the market: earnings, interest rates, and psychology. The first two are fundamental and reflect a form of real accounting or valuation of the underlying financial condition of a company. A psychology-driven market disconnects normal trading practices from the accounting fundamentals.
“Market movements in the short-term are a combination of the rational incorporation of new information, along with emotional reactions of market participants,” says Kenny Gatliff, Portfolio Manager at Keystone Wealth Partners in Chandler, Arizona. “In the case of a global pandemic scare, price drops are probably more the result of the latter. Unless the impact of the Coronavirus truly devalued the aggregate of publicly listed companies by 15% in a week, most likely investors have the opportunity to purchase stocks on sale which makes long-term return expectations even better.”
As some companies have already warned, COVID-19 will have an impact on the underlying financials of individual stocks. This, in turn, is expect to effect the economy as a whole. Here, you may find solace in looking at the historical log.
“Rapid developments in the Coronavirus outbreak have certainly given the markets reason for pause,” says Peter Donisanu, Chief Financial Strategist, Franklin Madison Advisors, in Pittsburgh. “In the near term, the Coronavirus has the potential to dent economic growth and this has contributed to heightened market volatility. Looking back on the various epidemics, wars and global recessions, history has shown that markets tend to move higher over the long term despite near term concerns.”
Therein lies the lesson to be learned (and remembered) if you have never learned it before (or have forgotten it).
“Market downturns and volatility spikes aren’t unique—even those that are caused by a potential pandemic, such as the SARS outbreak in 2003 and the Zika virus outbreak in 2016,” says Dejan Ilijevski, President at Sabela Capital Markets in Chicago. “Investors should try and understand that this turbulence doesn’t last forever and that markets can recover more quickly than you might think. Remember that investing is long term, and takes into account market dips and bumps along the way. Without risk, there is no expectation for reward.”
It is vital you maintain the discipline to invest for your future, not for your today. “As an investor, it’s important to remember that volatility is a normal part of investing,” says Krieg. “Don’t get caught up in short-term market news. Over time, staying in the market and long-term investing is the best approach.”
Be realistic in your expectations. Don’t think the economy won’t experience a little pain. But take a look at how other countries that experienced COVID-19 first have faired since the disease peaked.
“The Coronavirus is a new factor that will have a meaningful and direct impact on at least Q1 and Q2 global growth and earnings,” says Craig Birk, Chief Investment Officer, Personal Capital, San Francisco. “As such, it is reasonable that stocks have corrected rapidly. Direction from here will depend on clarity about how the virus and its spread will evolve beyond the spring. One encouraging observation is that the Chinese market corrected by roughly the same magnitude as the US, but a month earlier. Then it went up modestly.”
Understand and accept what is happening to the markets and what may continue to happen until the spread of the virus levels off (and this may take a few more weeks).
“Don’t panic and let your emotions make the financial decisions for your investments,” says Scott Krase, President of CrossPoint Wealth in Chicago. “That’s how you destroy long-term goals. Today’s headlines are scary and are likely to get even worse.”
The most important takeaway is to avoid becoming a victim of the fears and anxieties you see demonstrated with each news cycle. That will only jeopardize your comfortable retirement.
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