Take a deep breath.

 

We have experienced downturns before.

 

Think back to 2018. During the last quarter of the year, major stock indices in the Unites States suffered double-digit losses, much of it during December. What happened next? By the end of 2019, those indices had reached new highs.

 

The reasons for, and performance following, market downturns varies. The key is not to panic.

 

Last week, U.S. stock indices lost significant value when the coronavirus spread outside of China, and expectations for companies' performance in 2020 changed. At the start of the week, markets anticipated positive earnings growth (i.e., higher profits) during 2020. By the end of the week, they suspected earnings might be flat for the year.

 

At the end of last week, FactSet reported 68 companies in the Standard & Poor's 500 Index had offered negative earnings guidance for the first quarter. In other words, the companies didn't expect to be as profitable from January through March as analysts anticipated. That's fewer companies than normal, relative to the five-year average. However, the number could increase. FactSet's John Butters explained:

 

"... early in the quarter, a number of S&P 500 companies stated they were unable to quantify an impact from the coronavirus or did not include the impact from the coronavirus in their guidance. Thus, there may be an increase in the number of companies issuing negative guidance later in the first quarter as these companies gain clarity on the impact of the coronavirus on their businesses."

 

Changing profit expectations are one concern for investors. Another is fear. Investors are afraid the current economic expansion and bull market may end. At this point in the economic cycle, investors often are both hopeful and doubtful. The Economist explained:

 

"[Investors] hope that the good times will last, so they are reluctant to pull their money out. They also worry that the party may suddenly end. This is the late-cycle mindset. It reacts to occasional growth scares - about trade wars or corporate debt or some other upset. But it tends not to take them seriously for long."

 

Currently, investors are reacting to the coronavirus. They fear it will be the catalyst that sparks recession. While that's possible, in the past, markets have responded negatively to coronaviruses and then recovered. (Keep in mind, past performance is no indication of future results.) Barron's cited a private wealth manager who pointed out:

 

"...this isn't the first time that an epidemic has rocked the stock market. The S&P 500 fell 15 percent after SARS hit the market in 2003 but was up just over 1 percent six months after the outbreak began."

 

No matter the reason, it is unnerving to be an investor when stock markets head south. There is nothing comfortable about watching the value of your savings and investments decline. Regardless of the discomfort, selling when markets are falling has rarely proved to be a good idea. Investors who stay the course may have opportunities to regain lost value if the market recovers, as it has before.

 

Investors also may have opportunities to buy shares of attractive companies at reduced prices. Warren Buffet offered this reminder last week in a Barron's article:

 

"...[the coronavirus] makes no difference in our investments. There's always going to be some news, good or bad, every day. If somebody came and told me that the global growth rate was going to be down 1 percent instead of 1/10th of a percent, I'd still buy stocks if I liked the price, and I like the prices better today than I liked them last Friday."

 

Until the full effect of the coronavirus is known, markets are likely to remain volatile.