Wall Street and COVID-19: Taking StockSubmitted by Bernhardt Wealth Management on March 2nd, 2020
“Stocks Suffer Worst Week Since Financial Crisis amid Coronavirus Fears” —New York Times
“As Stock Markets Tumble Again because of Coronavirus, This Time Feels Different” —Washington Post
“Stocks Suffer Biggest Weekly Losses since 2008” —Wall Street Journal
These were just three of the headlines that greeted us during the past week. As they indicated, in response to reports of new outbreaks of novel coronavirus disease—now dubbed COVID-19—equity markets tumbled around the globe as traders and economists speculated on the effect of a possible pandemic on the world’s economies. Already, Apple has announced that it will likely miss earnings targets because of supply chain disruptions in China related to the disease. Quarantines and illness of workers has severely affected Chinese industrial output, and similar effects seem possible in other countries—now including Italy, Australia, Japan, South Korea, Germany, and the United States—where cases of COVID-19 have been reported. Leaders of the World Health Organization (WHO) and the U.S. Centers for Disease Control (CDC) have advised world, national, and state leaders to prepare for potential disruptions if the disease continues to spread.
All this has left many investors anxious and confused about what to do and where to turn for reliable advice. Reading headlines like those above does little to reassure, and watching the aggressive downward movement of the major market indexes this week has been difficult, even traumatic, for many people.
But let’s look at some facts that may help us get a better perspective. First of all, the statistics coming in from around the world seem to confirm that in the vast majority of cases, the illness is not fatal. In fact, of the 83,652 confirmed cases worldwide by the WHO, only 2,858 have resulted in death, the majority of which have involved very elderly persons or those with a previous, underlying health condition. While any death is deeply regrettable, the present mortality rate of just over 3% may not translate into the fearful scourge that some headlines seem to portray. In fact, a current report from Harvard Medical School indicates that in 80% of cases, persons with COVID-19 have only mild symptoms. In other words, it seems so far that most people who contract COVID-19 don’t get very sick or, if they do, recover with moderate intervention from healthcare professionals.
These points were underscored by a recent interview by internal medicine physician Dr. Drew Pinsky on Daily Blast Live, an internet video program. In answer to the question, “Are we overreacting?” he quickly said, “Yes… The press is overreacting… We need to wash our hands carefully, listen to the CDC… Be professional, journalists.” He made the further point that in the last two weeks of January 2020, 5,000 people in the U.S. died of influenza. “But that doesn’t get the [media] eyeballs that a mysterious new illness gets,” he said.
The good doctor makes an equally good point. How much of the hysteria around COVID-19 is hyped by headlines geared to grab reader’s attention and to garner clicks, “shares,” and “likes”? Certainly, when thousands of workers are quarantined to prevent the spread of an illness, there will be real economic consequences. But in time, as people return to work, supply chains will recover, commerce will resume, and we will all get back to the daily business of life—as will the financial markets.
On the other hand, the short-term financial impacts on equity markets have been all too real this week. To consider how investors should react to the tumble in the value of their portfolios, it might be instructive to look at past, similar disease epidemics and how the markets responded:
For context, it’s worth mentioning that the swine flu epidemic of 2009 killed over 200,000 people worldwide; to date, COVID-19 has taken the lives of slightly less than 3,000. While it is certainly too early to tell how long COVID-19 will continue to roil the markets, it seems likely that at some point, the effects will have worked their way through the system and the markets will return to where they were previously—before making new highs.
How long will that take? None of us knows. But it is likely that pulling out of the market amid this downturn, rather than saving the investor from losses, will in fact penalize long-term return. This point is underlined by 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 shows the growth of $1,000 invested in the S&P 500. It’s interesting to compare how $1,000 did when left in the market the entire time as opposed to missing just a few of market’s best-performing days by “sitting on the sidelines”:
In other words, over half of the total return over a period of 28 years resulted from just 25 days! Now, if you knew in advance which would be those few best (or worst) days, it would make complete sense to “time the market.” But none of us can make those predictions with any reliable accuracy.
In closing, let’s review a few important facts. First, we should follow the advice of the CDC, WHO, and other medical and scientific authorities: wash your hands more frequently and thoroughly; don’t go to work if you’re ill; avoid touching your face; and stay abreast of current developments by using reliable sources like CDC.gov and WHO.int. Whatever happens with your investments, it’s more important to take care of your physical health and that of your family!In other words, over half of the total return over a period of 28 years resulted from just 25 days! Now, if you knew in advance which would be those few best (or worst) days, it would make complete sense to “time the market.” But none of us can make those predictions with any reliable accuracy.
Second, to the degree you can, tune out the noise of financial and popular media; their job has more to do with selling advertising than with providing accurate information.
Third, avoid making any type of financial decision on the basis of emotion, whether fear or its opposite. These impulses are uniquely ill-fitted for long-term success in investing. Consider “riding it out” on the downside so that you’ll be in the best position to profit when things return to a more normal state.
Finally, talk to your financial adviser. We still don’t know how severe the downturn will be or how long it will last. But we do know markets inevitably fall now and then; we also fully expect they’ll eventually recover and continue upward. Since there’s never a bad time to receive good advice, we hope you’ll be in touch if we can help.