This has been a difficult week for investors. Increasing concerns about the coronavirus have taken markets and governments around the world by surprise. A steady flow of news underscores the unknown outcome these events could have on the markets.
The feeling of the unknown is often more impactful than the reality of the outcome.
As advisors, we must be diligent that the media is not the only voice our clients are hearing. Our goal below is to share a concise, fact-based narrative to help you gain perspective on what is taking place.
While it is often difficult to remember, events like these are not new. Most recently, in the fourth quarter of 2018, the S&P 500 fell 19.8%, with 15% of that in December alone. Markets recovered from this steep decline over a brief, four-month period and went on to reach record highs.
While the events that triggered the 2018 decline were different than those we face today, history highlights a powerful roadmap for how we should respond to deep declines in short periods of time.
No one can accurately predict how long these events will impact investors. When corrections occur, they are often exaggerated by computer trading and increased news flow. We believe this is a part of the steep decline that we have seen in the markets this week.
According to the Wall Street Journal, “Roughly 85% of all trading is on autopilot - controlled by machines, models or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast. Today, funds rely on computer models much more than they do on research and intuition.”
Historical data shows that economic slowdowns don’t start with a bang like we are currently experiencing, but rather, they occur over longer periods of time due to market changes in economic fundamentals. The core economic fundamentals in the US are strong. The current low interest rates, low unemployment and low inflation are all indicative of a strong economy.
We need to keep in mind that recent stock moves don’t offer a strictly rational reflection of the value of investments; rather, fluctuations are often emotionally driven, and fear is a powerful motivator.
Below is a chart that shows the impact of missing the best days in the markets since 1989.
This chart demonstrates that acting emotionally during volatile times like these is likely to create more challenges rather than positive, long-term outcomes.
The long-term outlook isn’t crystal clear. Seemingly, the markets have oversold on the unknown but history suggests the markets will find an equilibrium in the future.
Our recommendation is to stay the course, focus on the fundamentals. If the economics change, we will make the appropriate adjustments at that time.
We thank you for the opportunity to be your trusted advisor and to provide clarity and perspective during these times.