On Wednesday, March 11, 2020, the World Health Organization declared COVID-19 had officially reached global pandemic status. Immediately following, cancellations for the Houston Livestock Show & Rodeo, Austin’s SXSW, and all March Madness games began pouring in. Later that night, President Trump addressed the United States announcing a temporary travel ban from Europe to the United States.
The next morning, on March 12th, the US stock markets dropped over 7% upon opening causing limit breakers on Wall Street to freeze trading for 15 minutes. That day, the S&P500 closed at 9.5% down, at its worst daily performance since the 1987 crash.
People are scared.
COVID-19 has raised a lot of uncertainty in a short period of time. While the mortality rate has yet to be fully determined, many reports project that it ranges from just under 1% up to 1.2% of all cases. At first, this doesn’t sound terribly concerning, but when you consider that the virus could spread to thousands or even millions of people — 1% can be quite scary.
As a comparison, the 1918 influenza pandemic had a mortality rate of 2.5% and the 1957 influenza pandemic was closer to 0.6%. Most people who did not survive the virus had underlying health issues such as diabetes, hypertension, pulmonary disease, and most were over 60 year old.
Positive Outlook Regarding COVID-19
Because the vast majority of people who are infected only show normal flu-like symptoms and do not seek medical care, researchers are speculating that the actual deaths caused by COVID-19 may be much lower than 1.2%. Some researchers have noted that the mortality rate may be dramatically less than previous estimates since many carriers of COVID-19 in China showed little to no symptoms, and therefore the cases are underreported. In the 2009 H1N1 pandemic, mortality estimates initially started well over 3%, but eventually fell to less under 0.5%. The US also has one of the more robust health systems in the world. Outcomes here may likely look very different than in China. This is one of the reasons we believe we are seeing that 99% of the 1,675 active cases in the US are “Mild Condition” and only 1% are “Serious or Critical” (as of March 12th, 2020 at 10:20pm).
As the disease continues spreading to new continents, the speed at which the world has researched medicinal options to treat the disease is unprecedented. Chinese scientists sequenced the genome for COVID-19 within two weeks of the first reported case. The National Institute of Health is conducting a trial on the use of antivirals to treat the coronavirus. Work has begun on a vaccine, which may be available later this year.
Market Impact of Coronavirus
Let’s settle one thing outright: No one knows the full extent of how COVID-19 will affect the market short-term. We don’t know how far the virus will spread across the US or around the world, and we can’t forecast how many deaths there will be. Likewise, we don’t know what is going to happen to the market in the near-term.
To speculate, here are a few options. We could:
Don’t Try to "Time the Market"
Some people believe the market will continue to decline and that they should sell now and buy back in when the world has settled down. In short, they believe they can time the market.
The problem with trying to time the market is:
I have heard people say that the time to buy is when “things settle down” or when the “news turns positive,” but let me share a secret: By the time the world appears calmer, the market has already gone up. As the saying goes, “the time to buy is when there’s blood in the streets,” or as Warren Buffet says, “be fearful when others are greedy and greedy when others are fearful.”
Over the long-run, markets don’t care about news or investor psychology, only about earnings. As value investor Benjamin Graham has said, “in the short run, the market is a voting machine; but in the long run, it is a weighing machine.”
The market right now is being pushed down by the uncertainty of the virus’ impact on company’s earnings. If we look at the long-term, Graham implies that these short-term runs of volatility will get smoothed out and market movements will reflect the real value of organizations over time. Companies have not lost over a quarter of their long-term real value over 15 days. Stick with it.
What Can We Expect Long-Term & How to Prepare Now
In times of tragedy, panic, and fear, people tend to over dramatize the impact these events will have on the market long-term. Take for instance, the terrorist attack on the Twin Towers on 9/11/2001. Following the incident, the market took a dive. Travel stopped and businesses halted. People assumed that it would take years for business to recover—if it ever did; however, instead the S&P 500 regained its pre-9/11 price levels within one month of the attack.
This too shall pass. Despite what the talking heads on the news says, we are all not going to die, we are not all going to contract COVID-19, and the US economy is going to recover.
What not to do in wake of COVID-19?
You may think you can outsmart this one. Many people believe that global events and pandemics provide the best opportunity to liquidate securities and go to cash while they wait to determine the best time to buy back into the market later. This is an investment mistake we see all the time during periods of heightened volatility.
As we mentioned above, trying to time the market requires you to make two decisions correctly in succession. If you’re not 100% correct both times you make a decision, you will likely be worse off. Let’s take a look at the end of 2018, for example. The market started to drop in September of 2018 until December where it hit a 20% decline from the all-time high. We saw people want to pull out of the market primarily in December—near the all-time low. However, using the chart below, you can see that those people also missed out on a huge market run in 2019 where we saw over 30% returns in the S&P 500.
The world is pretty scary right now. It’s easy to start imagining the worst. So let’s speculate for a second and really think about it. There are two ultimate outcomes following COVID-19 to consider:
Nobody is going to announce that the rout is over, and it’s time to get back in before the recovery begins.
Pandemics Aren’t a New Cause for Market Volatility
In 2003, SARS became the first coronavirus to cause severe disease as it appeared in 26 countries globally. It was followed by MERS in 2012 and now COVID-19 in 2020. While COVID-19 is one of the most widely hyped pandemics, it’s not exactly new; since disease as a whole hasn’t been eradicated, similar phenomena are likely to occur again and again over time.
The fundamental principle of financial markets is supply and demand. Right now, we’re seeing a temporary disruption of trade and the impact it has on the markets. As a result, earnings are likely to be down globally for a quarter or two and the fears from the public are creating continued volatility. While this has caused a lot of uproar and panic, we believe it also creates opportunities for financial planning, investment opportunities, and tax benefits.
What can you be doing now?
Right now, many people are focusing on the recent market results. We believe this is a short-sighted approach. We are constantly meeting with our clients to fine tune their long-term plan (which includes planning for markets like this.) Your financial plan accounts for where you stand today and takes into account your goals for the future. We continually work with our clients to ensure they have appropriate liquidity for their short-term needs through cash, fixed income, or other assets. Stocks are for the long-term.
Additionally, here are a few strategies we’re taking advantage of for our clients in the current economic climate:
Remember — This too will pass. It feels like the world under the Coronavirus isn’t getting better and will only get worse. But we know this will eventually, somehow, someday pass, so it’s important to stay invested and ride out the volatility. Historically, the market has done really well after one-day significant market drops, so, though we don’t know exactly when, the market will rebound.
Volatile markets are a wise investor’s best friend and can present opportunities. We plan to take advantage of them. We believe there will be opportunities to rebalance. We believe there are opportunities that comprehensive planning can unlock for you, including tax benefits—which can leave investors better off after the recovery than they were before the initial downturn.
Recovery in the market could take weeks, months, or (while we doubt it) possibly longer. In the meantime, we’re ensuring that our clients’ short-term needs are met without having to tap their equity positions. As part of our comprehensive asset management and planning process, we sit down with clients regularly to review portfolio(s) and assess market conditions, educating them on available options and assisting in making the changes necessary to optimize their specific situation. If you have any questions or would like to discuss your portfolio, please contact your advisor or schedule a complimentary meeting with one of our financial planning experts.