Strategies for a Pandemic

Strategies for a Pandemic

by Mike Jette on Feb 26, 2020

The last two days have certainly seen some volatility in financial markets, and we are suddenly all getting used to the word "pandemic". It may surprise you to learn that only two of my clients have reached out to me so far, and both were looking for stocks to buy on this dip… By the way, it is too early and this correction is too small to create buying opportunities as I am writing this.

Part of me is proud that my phone hasn’t been ringing about this market move. I think most of our clients know that at this point we are seeing normal volatility and there isn’t much to do about it. I do think people are asking the question: How will the Coronavirus (COVID-19) affect my investment portfolio? Of course, the unsatisfying answer is: we honestly have no idea.  The statistics keep changing, but currently the most deaths (2,664) have been confined to China, with 15 reported in Iran, 11 in South Korea, 7 in Italy and 4 on a Diamond Princess Cruise ship off the coast of Japan.  We have no idea how far or fast the disease will spread, and neither do the markets… Markets hate uncertainty. If the total deaths from COVID-19 reach over 20,000 in the coming weeks, then it will have killed about one tenth of the number of people that die every year from influenza.

So why do markets react so intensely to what seems to affect such a small number of people worldwide? The real concern is that reactions to the virus will have an economic impact. Shutting down schools, plants and offices can hinder production. Consumers deciding to change their lifestyles or travel less can affect the global economy. Again, we just don’t know.

What we do know is that historically, every health scare has created only a short-term correction. When the public became aware of the SARS epidemic (a previous strain of the Coronavirus) back in 2003, the S&P 500 index fell 14% over the subsequent two months, from mid-January to mid-March.  But, according to a historical look-back by the MarketWatch economists, the market was up 20.76% a year later. The Avian flu outbreak in 2006, the Swine flu outbreak in 2009, the Ebola outbreak in 2014 and the Zika epidemic in 2016 saw initial downturns between 5.5% and 7%, but a year later, the markets had recovered by between 10 and 36 percent.
As Larry always says, “Corrections are temporary”.

Market timing during times of market stress is psychologically appealing, but in the real world it is pretty much impossible to execute.  Not knowing when to get out (Yesterday? Two days ago?) and especially not knowing when to get back in, mean that your odds of getting it right twice are about 25% or less—and remember that you already missed the first timing decision, which would have been to get out last week.

So in the real, rational world, you have two choices: ride it out or contact our offices if you are feeling real mental distress over these two days of downturns. It could mean that you need a permanent reduction in your portfolio’s risk profile before you make a mistake out of panic that could harm your financial future.

Bottom Line: At this point we are seeing some normal volatility over the Coronavirus health scare. If things get worse, it may create some buying opportunities. But for now, there’s no need to be surprised by the market headlines.