What does the coronavirus mean for investments?
There is no simple answer to that question (of course), as the ultimate impact will be determined by how quickly the virus is contained. The influence of any government and central bank action will also play a part. But we can gather a few clues from how markets have responded to past epidemics.
There have been at least a dozen well-publicized epidemics over the past 40 years (Zika, Ebola, MERS, H1N1, SARS, etc.). As one would expect, stocks have tended to drop sharply in the short-term, as fear of the unknown ramps up quickly. For instance, during both the 2015/2016 Zika virus and 2003 SARS outbreak, the S&P 500 index fell about 13% from its high. With the current coronavirus situation, the S&P is down about 9% from its high point. The good news is that stock market fear is often short-lived.
In 11 of the 12 epidemic scenarios since 1980, the market (S&P 500) was positive six months after the start of the epidemic, with an average price return of 8.8%. The average gain over 12-months was 13.6% (source: First Trust Portfolios L.P.). Markets have a tendency to react sharply to both positive and negative news in the short-run, but long-term economic growth is what drives investment returns over time.
Once again, we have another example of the benefits of bonds and a well-diversified portfolio! Despite (painfully) low yields, bonds have helped cushion the impact that a negative surprise can have on stocks. This is also a reminder of how market disruptions arise in a very unpredictable way (i.e. a pandemic was not on the radar a few months ago). Whether we feel good or bad about the economy and stocks, there is always the potential for unexpected surprises to change the picture entirely. As always, it is best to stick with the plan that was put in place to deal with the unexpected. This too shall pass!
Please reach out with any comments or questions.
The LPP Team