We recently communicated with you about the possibility of a negative stock market reaction to the potential spread of the Coronavirus. Over the past few days, we've seen global stock markets around the world fall sharply as investors worried the Coronavirus may be spreading in the US. Exacerbating the issue, were media headlines about the Dow Jones Industrial Average (Dow) shedding points in the thousands, yesterday being the largest single point drop in history. Media sources created an echo chamber of “never before,” “first time ever,” and “worst in history" headlines helping to drive investors toward the exits.
We are not taking this lightly and we completely understand how difficult times like this can be. It’s not easy to watch our account balances drop as quickly as they did this week; however, we need to maintain perspective and a long-term focus.
During times like this, it is worth remembering a few things we have discussed:
- We expect and have prepared for market volatility. In fact, during the stock market upswing in 2019, we worked with managers to proactively sell stocks through the year to keep portfolios from breaching desired risk levels.
- The price of overreacting to short term shocks to the market and media hype, and being wrong, is high - as those who sold their investments in 2008 painfully know.
- A focus on points can be misleading. A change in points provides us with the direction of the market, but without a critical frame of reference. Point moves are larger than they were 10 or 15 years ago, but the Dow itself is much higher, too. Percentages give us a perspective that points cannot. At yesterday’s close of 25,767, the Dow is up 22.7% from its close on February 26, 2017.
While our account values have fallen sharply this week, nearly all our clients experienced mid to high double digit returns during 2019. The net effect of this year’s declines, thus far, is still mid to high double digits over the past 14 months.
Please, don’t get sucked into the fear driving, "shock and awe" point drop hype. While it’s true that we experienced the largest point drop in history, it was NOT the largest
percentage drop ever. In fact, the Dow has experienced
many similar percentage drops during its history.
Volatility never feels good and profitable investing is rarely comfortable. We are likely to hear about more coronavirus cases around the world and the US, and the stock market may continue to experience declines as a result. However, as with all other serious and negative market events, it’s highly likely the stock market will find its footing.
As we noted in our communication of January 30, 2020, history may provide insights worthy of consideration. The stock market’s reaction to past outbreaks and quickly spreading diseases was often short-lived, and positive within six months of the first occurrence (see chart below):
