As I write this, the DJIA is down 1,911 points for the last two days (about 6%) and the S&P 500 is off about 210 (also about 6%); other major US and global markets are in similar territory. The reason? Reports of major outbreaks of COVID-19 (formerly called coronavirus) in South Korea, and, maybe more importantly, in areas outside Asia such as Italy. Given the importance of China to most manufacturing supply chains—especially Apple—news of a worsening outlook for the epidemic is certainly spooking the markets.
In a recent article for Financial Planning Magazine, I looked back over the market’s responses to similar disease outbreaks in the past. Here are some statistics:
Source: Dow Jones Market Data
It’s also worth remembering that the swine flu pandemic in 2009 claimed the lives of some 200,000 people worldwide. Thus far, COVID-19 has infected about 70,000 people and taken the lives of just over 2,000. Any loss of life is certainly tragic, but it may be important to remember that this particular outbreak, at least so far, does not seem to pose the same magnitude of risk as other epidemics we have faced successfully in the past.
What should investors do in the meantime? First of all, we should all be practicing good personal hygiene with lots of handwashing. Financially, you should remember that while the market’s response to new headlines is beyond your control, your response is not. Reacting emotionally will usually not be beneficial to your portfolio. Historically, downside market reactions to developments such as COVID-19 have been relatively swift, with upside recovery taking more time. And yet, we should all remember that the financial markets have proven remarkably resilient in the past. For example, before the SARS outbreak in 2002, the S&P 500 was at 1,140. Before the MERS epidemic of 2013, it was at 1,480. Today, it is over 3,200.
The other reason to avoid knee-jerk reactions is well-captured in a research report from Dimensional Fund Advisors in response to another period of market volatility back in the summer of 2019. Looking back at the period from 1990–2018, the report notes that the total return of $1,000 left invested in the S&P 500 for the entire term was an annualized rate of 9.29%. However, if one missed only one day of the index’s best days by pulling out of the market, the return dropped to 8.87%. If you missed the five best days, your return fell to 7.75%. Missing the 15 best days dropped your return to 5.79%, and being out of the market on the 25 best days for the S&P 500 pulled your return over the 28-year period down to 4.18%. I hope the moral is obvious: jumping out of the market in an emotional attempt to “save money” usually accomplishes the opposite! Unless, of course, you know exactly which days in the market are going to be the best. I don’t know what those days are, and I don’t know anyone else who does, either!
What you should do, of course, instead of trying to manipulate what you can’t control, is to focus on what you can do something about: proper diversification, rebalancing when needed, and opportunities to buy on pullbacks.
If you’d like a copy of my latest monthly newsletter, “‘Rumors of My Demise Are Greatly Exaggerated’: Value Stocks and the Patient Investor,” please click here. Or if you’d just like to discuss your investments in light of current market events, I would love to speak with you.
Stay Diversified, Stay YOUR Course!