World stock and bond markets have paid intermittent attention to the emergent coronavirus over the last several weeks. But with weekend news suggesting its spread well beyond China, the virus has grabbed the market’s full attention this week. As this is written, the S&P 500 is down about 7% from last Wednesday (an all-time high, by the way) on fears that the virus will meaningfully dent economic activity. Consistent with both economic slowing and a flight to safety, yields on US government bonds have plunged, reaching record lows and pushing up bond prices.
Already there is plenty of evidence the virus will crimp global growth. China’s giant economy is in temporary contraction as both workers and consumers stay home, either voluntarily or as part of a quarantine effort. The economic impact extends well beyond China, given the country’s outsized role in global supply chains. Apple, for example, announced a few days ago that iPhone deliveries would miss targets because of production shortfalls. Anecdotally, everyone knows someone having second thoughts about an upcoming vacation or business trip.
So much is not knowable at this time—the degree to which infection will spread, the severity of the disease for those infected, as well as the economic impact. Markets loathe uncertainty because it makes it difficult to price assets whose value depends on an obscured future. In the absence of clarity, investors will understandably give more weight to worst-case scenarios.
With the coronavirus, that scenario would involve widespread infection globally and a large toll on the collective physical and psychic well-being. The economic and financial impact would surely include reduced consumer confidence and spending, a sharp downturn in economic activity and corporate earnings, and many disruptions to daily life.
Of course, we hope it does not come to that. But it could, and we think it’s better to acknowledge this reality than to indulge in denial and wishful thinking.
From our perspective as your investment advisor, the question then is, what, if anything, should a long-term investor do in response? Here are a few thoughts we hope you will find helpful.
- After eleven years of mostly rising markets, it’s easy to forget that the stock market does decline from time to time, sometimes quickly and sometimes substantially. This risk is the price stock investors pay for the expectation of superior long-term returns.
- Bear markets, when they happen, are always unpleasant and occasionally frightening. But whatever their cause, bear markets eventually pass, typically within about 2-3 years. From the long-term investor’s perspective, they are setbacks, but they do not change the ultimate destination or the best course for reaching it.
- The timing of a decline—both its start and its end—cannot be known in advance. Trying to sidestep a decline entails the greater risk of permanently abandoning a rational long-term plan.
- A proper asset allocation can be defined as one that permits you to “stay the course” amid a market decline of whatever duration. That is why we spend so much time focused on getting a client’s asset allocation right—for their age, goals, and risk tolerance.
- The bulk of the assets we manage are in investment strategies that incorporate regular adjustments in response to periods of elevated market volatility and/or prolonged decline. These adjustments may moderate some of the swings, but they should not be expected to avoid the general market trend.
- Virtually all our clients have some portion of their portfolio in bonds, which acts as ballast for the portfolio. During the stock market’s decline of the past few days, bond prices have risen, providing a shock absorber for the portfolio.
Finally, if the news has you worrying about your portfolio, please phone or email us and we’ll talk it over. A big part of our job is helping clients weather the inevitable market storms while keeping our eyes on the long-term goals.