In light of recent volatility attributable to the spread of the coronavirus – technically, COVID-19 – it's appropriate to provide some insight into what is happening in the equity markets, and how State Bank of Cross Plains' wealth managers are responding. The drama that has played out over the past couple of weeks has resulted in a correction (a 10% drop from a recent peak) in the stock market in an extremely short period of time. In fact, right before the outbreak, markets had hit an all-time high. The perceived severity of the downturn (due to its rapidity) has stoked fears of a 2008 market sell-off and, perhaps, a recession.
Due to uncertainty surrounding the virus’s containment, now is a good time to review the markets in general, consider the impacts that previous viral outbreaks have had, examine current economic activity in China, and determine what actions might be appropriate going forward. One important takeaway, however, is this: We do not expect a recession this year, and we think that, as the year unfolds, things will settle down and move back in a positive direction.
As recently as the week of February 17th, equity markets hit another all-time high. This happened on the heels of January’s negative results, which were influenced by COVID-19, and amid growing fears over economic data coming out of China.
The large run-up in 2019, and so far in 2020, has pushed equity markets to be largely overvalued and in need of either a correction or substantial earnings gains in place of one. This is a natural market process and should not take anyone by surprise. Another factor at play is this year’s elections; the markets do not like uncertainty, and the mystery surrounding the identity of the next Commander-in-Chief has only helped to fan the flames of this correction. A final, although very important, consideration has been the dramatic rise in computer or algorithmic trading. In recent years, there have been a few instances of markets whipsawing down and up, and studies have shown that they are due, in part, to this type of trading.
At the end of the day, the markets have been due for a correction, and although it may seem to the contrary, what’s happening now is in many ways normal (although the speed with which things are happening may be somewhat unnerving). Volatility, in and of itself, is nothing to be afraid of, and perhaps may offer some attractive buying and selling opportunities for investors.
In the 21st Century alone, there have been at least five viral outbreaks of significant proportion – in addition to annual flu and measles outbreaks – and though each impacted markets in the short term, its effects ultimately faded over time. Such events are transitory, and as they are handled, the world’s economy tends to pick up where it left off.
Some perspective may be in order. In most instances, markets have largely recovered within six to 12 months of the onset of the virus. Whether that plays out here is too early to tell. But given the fact that U.S. economic data was picking up steam at the start of the year, it won’t be hugely surprising if it does.
Economic Activity in China
It’s important to get a handle on the impact that the virtual shutdown of many of China’s largest cities will have on the global economy. China is the second-largest economy in the world; therefore, any dramatic slowing affects things everywhere. The U.S. has less direct economic ties to China than do other countries, especially emerging-market nations, which should insulate domestic investors somewhat.
Activity in the form of factories and other businesses reopening has been happening in the East slowly, but surely. What remains to be seen is how this may play out once more workers are back on the job, taking the train, and resuming normal life. A second outbreak would be, obviously, disconcerting. But the declining number of new cases in China and the gradual return to normalcy in the place where the virus originated are both encouraging.
Though the virus certainly does pose risks, it will more than likely be viewed, in history, as a transitory event. Trying to protect the downside first should help to reduce both volatility and losses. If you are positioned accordingly, you should be able to withstand market events such as this one.
So what can you do?
- Work with your State Bank of Cross Plains wealth manager to either establish or review your long-term plan and strategy, taking your goals and risk tolerances into account. This will provide you an anchor during the storm.
- Once a plan or strategy has been confirmed or reviewed, make adjustments to your portfolio as necessary. A diversified portfolio doesn’t guarantee that you won’t ever have losses, but it smooths out the ride and may allow you to sleep better at night.
- Avoid the temptation to time the market, and, if possible, dollar-cost average your way into the market. This will mitigate the stress of making decisions at the wrong time, and by dollar-cost averaging, you’ll take advantage of lower prices for some of your investments. Data shows that staying fully invested in stocks over the period of 1997 through 2016 would have provided a 7.68% return, while missing the 40 best days would have meant a return of negative 2.42%. The key here is that 6 of the 10 best days occurred within two weeks of the 10 worst days. In fact, missing just the 10 best days would have reduced your return to just 4.0% as well.
Please note that we are not overreacting to current events, but are mindful of them. We have taken steps that we feel are appropriate, and will continue to do so as conditions merit. Please call State Bank of Cross Plains' Wealth Management department at (608) 826-3570 to discuss these or any other issues that you may have.