Gone Viral: Will the Coronavirus Infect Your Portfolio?Submitted by Bernhardt Wealth Management on February 10th, 2020
On Friday, January 31, major market indexes slumped on fears around the coronavirus epidemic, reviving concerns in many quarters about its potential effects on world financial markets and prompting calming messages from Chinese authorities and elsewhere. Certainly, the personal health risks associated with the disease are nothing to take lightly, but should we be concerned about the health of the markets? And more importantly, should you be worried about the effects on your investments?
Investors who have been in the markets for at least 20 years probably still have memories of the SARS outbreak in 2002, the MERS epidemic in 2012, and other international health incidents that spurred similar waves of anxiety. Questions may be going through your mind: “Is it time to reposition?” “What if the Chinese market tanks; will my portfolio be okay?” “Should we start buying bonds?” “Is this a black swan event?”
Certainly, we cannot be sure how far the outbreak—so far confined largely to China and the eastern Pacific Rim—will spread. Nor can we predict how long it will take for the best epidemiologists in the world, who are currently focusing most of their energy on the coronavirus, to bring it under control.
What we do know, however, is that we have faced similar outbreaks before, some even more deadly than the coronavirus appears to be so far, and the world financial markets are still doing a robust job of pricing investments and creating wealth. In the last 20 years, we’ve faced outbreaks of SARS, MERS (both of which were varieties of coronavirus, by the way), ebola, swine flu, bird flu, and even measles, not to mention the flu pandemic in 2009 that took the lives of 203,000 people worldwide. History tells us that, while each death is a tragedy, global health organizations and researchers have proven resilient and resourceful in their application of science to these outbreaks.
History also tells us that the financial markets have managed to continue functioning efficiently and profitably for the long term. In January 2002, months prior to the outbreak of the SARS epidemic, the Dow stood near 14,000; the S&P 500 was at 1,140, and the NASDAQ registered 2,806. In the case of most of the outbreaks listed above, the indexes initially plunged on fears of the effects of the disease. But it’s instructive to see what developed after the initial warnings. On average, in the first full month following the announcement of similar outbreaks, world equity markets have risen by 0.44%. For the three months following onset, the average change was +3.08%, and by six months after the beginning of an epidemic, world stock markets were up 8.5%, on average.
Today, of course, the Dow is well over 28,000, the S&P 500 is north of 3,200, and the NASDAQ is at almost 9,300. Recently, Chinese markets rallied on a $71 billion liquidity injection from the Chinese central bank.
Investors should bear these facts in mind and remember also that making investment decisions of any kind on the basis of an emotional reaction to headlines is typically a mistake. Instead, patient, disciplined investors should continue to focus on what they can control: proper diversification, disciplined rebalancing, and commitment to a long-term strategy.
If you have questions about your portfolio, current market events, or any other financial matter, we are here to help.